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Rating Action:

Moody's confirms RussNeft's B2 rating; stable outlook

13 Apr 2016

London, 13 April 2016 -- Moody's Investors Service (Moody's) has confirmed the B2 corporate family rating (CFR) and B2-PD probability of default rating (PDR) of RussNeft, a Russian oil exploration and production company. The outlook on the ratings is stable. Today's action concludes the rating review initiated by Moody's on 22 January 2016.

"We have confirmed RussNeft's B2 rating on the back of its successful efforts to significantly reduce leverage through debt restructuring and we expect the deleveraging to continue throughout 2016. This has enabled the company to achieve a more sustainable capital structure in the current period of 'lower for longer' oil prices," says Denis Perevezentsev, a Moody's Vice President -- Senior Credit Officer.

RATINGS RATIONALE

Today's confirmation of RussNeft's ratings reflects the company's improved capital structure as a result of related party debt for equity transactions implemented in Q4 2015, resulting in Moody's-adjusted gross debt falling to $2.5 billion as of 31 December 2015 compared with $4.9 billion as of 31 December 2014. It also factors in Moody's expectation that RussNeft will further reduce debt by about $1.2 billion during 2016, which will bring its debt down to about $1.3 billion by year-end 2016.

Following the conversion of related party debt into equity, Glencore International AG (Baa3 stable), via its entity Rambero Holding AG (not rated), became 46% owner of RussNeft, thereby ceasing its ownership at the operating company level. Total RussNeft's debt decreased to about $2.5 billion as of 31 December 2015.

As of 31 December 2015, Russneft's debt consisted of a loan from Bank VTB, JSC (VTB, Ba1 senior unsecured rating, on review for downgrade) of about $2.0 billion, with the remaining debt due to related parties controlled by Mr. Gutseriev: $154 million in promissory notes maturing not later than 2024 due to GCM Global Energy plc (not rated), a $300 million amortising loan due to Belyrian (not rated) due 31 March 2025.

RussNeft exchanged $154 million of debt owed to GCM Global Energy into equity in Q1 2016 and plans to convert into equity $300 million of debt it owes to Belyrian in 2016. The company plans to reduce the debt it owes to VTB by about $700 million in 2016 by replacing this facility with related party debt, which it will exchange into equity at a later stage.

Following the completion of its debt restructuring, RussNeft has achieved a more sustainable liquidity profile over the next 18-24 months. The company's principal payments under its $2.0 billion loan from VTB will not exceed $40 million a year until March 2018, providing for a comfortable debt service profile. Moody's notes that principal amounts to be repaid will grow materially for RussNeft starting from March 2018, when the company will have to repay $110 million per quarter until Q1 2020 and $100 million per quarter from Q2 2020 until the repayment of the VTB facilities in 2023.

These amounts exceed the company's current operating cash flows. However, in the light of expected further reduction in debt owed to VTB in 2016, Moody's anticipates that the amounts due under this loan facility to VTB in 2018-23 will be reduced accordingly.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects Moody's expectation that RussNeft will sustainably maintain adequate leverage metrics and liquidity. The corporate structure of RussNeft is likely to further evolve in the medium term, which may involve merging into its beneficiary's other holdings (which are not within the rated perimeter, such as Neftisa), and engaging in meaningful asset transfer transactions with related parties.

Although debt restructuring resulted in material improvement in the company's debt/capital structure, the rating agency notes that the visibility over the company's future asset composition, long-term capital structure, production profile and financial policies, as well as information disclosure, remains very limited.

WHAT COULD CHANGE THE RATING UP/DOWN

Currently there is limited potential of any upward rating pressure on the company's rating. Moody's could upgrade RussNeft if it were to demonstrate (1) greater clarity and stability over its reserves, production and cash flow generation profile, addressing Moody's longer term liquidity concerns; (2) an ability to maintain profitability and reserves replacement ratios commensurate with industry levels; (3) clarity on the group's assets composition and organisational structure; and (4) further deleveraging.

Moody's would consider a negative rating action if RussNeft's financial and/or operating profile were to deteriorate beyond Moody's current expectations. Lack of transparency over future cash flow generation capacity, including that resulting from related-party transactions would also exert pressure on the ratings.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Global Independent Exploration and Production Industry published in December 2011. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Moscow, RussNeft operates a number of oilfields on the territory of Russia (Ba1 review for downgrade). The company had approximately 1237.1 million barrels of oil equivalent of proven oil and gas reserves in accordance with the Society of Petroleum Engineers' Petroleum Resources Management System (SPE-PRMS) classification as at 31 December 2015. In 2015, RussNeft produced 7.38 million tonnes of crude oil and condensate and 2.03 million cubic meters of gas. The company reported $1.7 billion in revenue for 2015 and its Moody's-adjusted EBITDA for the same period amounted to $648 million.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Denis Perevezentsev
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Limited, Russian Branch
7th floor, Four Winds Plaza
21 1st Tverskaya-Yamskaya St.
Moscow 125047
Russia
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Victoria Maisuradze
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
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JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's confirms RussNeft's B2 rating; stable outlook
No Related Data.
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