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Rating Action:

Moody's confirms Sovcomflot's Ba2 rating; negative outlook

04 Jul 2014

$800 million of rated debt affected

London, 04 July 2014 -- Moody's Investors Service has today confirmed the Ba2 corporate family rating (CFR) and the Ba2-PD probability of default rating (PDR) of Sovcomflot JSC. Concurrently, Moody's has confirmed Sovcomflot's Ba3 senior unsecured issuer rating and the Ba3 senior unsecured rating assigned to the $800 million Eurobond issued by SCF Capital Limited, which is a 100% indirect subsidiary of Sovcomflot (Sovcomflot guarantees the Eurobond). The outlook on all ratings is negative. This concludes the review for downgrade initiated by Moody's on 1 April 2014.

RATINGS RATIONALE

Today's confirmation of Sovcomflot's ratings reflects Moody's expectation that the company will be able to improve its financial metrics over the next 12-18 months, as a result of (1) the completion of a number of new vessels that start generating EBITDA and (2) a temporary improvement in trading conditions in the international crude oil shipping market in the first quarter of 2014.

As Sovcomflot is a 100% state-owned company, Moody's applies its Government-Related Issuer (GRI) rating methodology in determining the company's CFR. According to this methodology, the rating is driven by a combination of (1) Sovcomflot's baseline credit assessment (BCA), which is a measure of standalone credit strength, of b2; (2) the Baa1 local currency rating of the Russian government; (3) the low default dependence between Sovcomflot and the government; and (4) the strong probability of provision of state support to the company in the event of financial distress.

The negative outlook on the ratings reflects Moody's concern that the recovery of Sovcomflot's financial metrics to the levels commensurate with its b2 BCA and Ba2 CFR, may take longer than expected because of continuing challenging market environment. A downgrade could be considered if the company does not reduce its leverage to 6.5x adjusted debt/EBITDA while maintaining adjusted funds from operations (FFO) interest coverage at 3.0x over the next 12 to 18 months.

In addition to stretched financial metrics, Sovcomflot's rating and outlook factor in (1) its negative free cash flow generation resulting from the company's continued significant investment in new vessels; (2) Moody's expectation that trading conditions in the global tanker market will remain challenging for the next 12-18 months; (3) the company's reliance on new external funding to continue financing its capex programme; and (4) the weakening of Russia's medium-term economic growth outlook, and Russia's heightened susceptibility to geo-political event risk resulting from the conflict in Ukraine which may affect SCF's operating performance and position in the international market.

More positively, in addition to Moody's expectation of an improvement in Sovcomflot's financial metrics, the rating remains underpinned by (1) Sovcomflot's strong customer base; (2) its diversification into the gas transportation and offshore businesses, which complement its conventional tanker business; (3) its specialised ice-class fleet (including Arctic shuttle tankers), which provides the company with a competitive advantage for servicing projects and operations in harsh weather conditions; (4) its conservative fleet management, with limited exposure to the spot tanker market; and (5) its balanced debt maturity profile and good access to asset financing.

Both Sovcomflot's senior unsecured issuer rating and the senior unsecured rating assigned to SCF Capital's Eurobond issuance are one notch below the CFR. This differential continues to reflect the structural and contractual subordination of the bond to secured debt located at the operating company level, which comprises a major portion of the Sovcomflot group's total debt. The differential could increase to two notches if the company's CFR were downgraded.

WHAT COULD CHANGE THE RATINGS UP/DOWN

Upward pressure on Sovcomflot's ratings is unlikely at present, given the weak credit metrics for the category and the negative outlook. Moody's could change the outlook on the ratings to stable if the company's financial metrics were to demonstrate a clear improvement trend in the course of 2014, with adjusted debt/EBITDA trending towards 6.5x and adjusted FFO interest coverage remaining at or above 3.0x, while maintaining adequate liquidity which will require to put in place additional financing over the next few months.

Moody's could downgrade Sovcomflot's ratings if (1) it expected that the company's adjusted debt/EBITDA will remain above 6.5x and adjusted FFO interest coverage will decline below 3.0x on a sustained basis; (2) Sovcomflot does not maintain sufficient liquidity and does not execute appropriate refinancing on a timely basis; or (3) Moody's were to revise downwards its assessment of the probability of the government providing extraordinary support to the company in the event of financial distress.

PRINCIPAL METHODOLOGIES

The principal methodology used in these ratings was the Global Shipping Industry published in February 2014. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009 and the Government-Related Issuers: Methodology Update published in July 2010. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Sovcomflot JSC is the leading Russian energy shipping group, servicing around 25% of all seaborne hydrocarbons exports from Russia. The company is 100% state-owned. In 2013, Sovcomflot generated revenues of $1.3 billion. The company ranks among the world's top five energy shipping players by deadweight tonnage (DWT), with a fleet of 135 own vessels for a total of 11.6 million DWT as of March 2014. In addition, five ordered vessels, totalling 0.4 million DWT, are to be delivered in 2014-16.

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Artem Frolov
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Limited, Russian Branch
7th floor, Four Winds Plaza
21 1st Tverskaya-Yamskaya St.
Moscow 125047
Russia

Jean-Michel Carayon
Senior Vice President
Corporate Finance Group
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Moody's confirms Sovcomflot's Ba2 rating; negative outlook
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