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Rating Action:

Moody's downgrades Novorossiysk Commercial Sea Port to Ba3 from Ba1; stable outlook (Russia)

13 May 2011

Approximately US$300 million of debt affected

London, 13 May 2011 -- Moody's Investors Service has today downgraded to Ba3/Aa3.ru from Ba1/Aa1.ru (on review for downgrade) the corporate family rating (CFR) and probability of default rating (PDR) of PJSC Novorossiysk Commercial Seaport ("NCSP"). Concurrently, Moody's has also downgraded the USD300 million worth of 7% loan participation notes due in 2012 issued by Novorossiysk Port Capital S.A. (the "Loan Participation Notes") to B1/Loss Given Default assessment of LGD4 from Ba1/LGD4. In addition, Moody's has affirmed NCSP's 50% family-wide LGD assessment. The rating outlook is stable.

RATINGS RATIONALE

Moody's two-notch downgrade of NCSP's issuer rating follows its completion of the debt-financed acquisition of Primorsk Trade Port LLC ("PTP") and various changes to NCSP's share ownership structure, including the change of control of the company. This rating action concludes the review for downgrade of NCSP's ratings initiated on 27 September 2010 in response to the company's announcement that it intended to acquire PTP.

"More particularly, the rating downgrade reflects NCSP's increased debt burden and the terms of the USD1.95 billion term loan facility provided by Sberbank to finance the acquisition of PTP (the "Sberbank Loan")," says Andrew Blease, a Moody's Senior Vice President and lead analyst for NCSP. "This is offset somewhat by the larger scale of the NCSP group following its acquisition of PTP and its increased strategic importance," adds Mr Blease. As a rating methodology technicality, Moody's has also removed the specific one-notch uplift to NCSP's rating previously incorporated to reflect the likelihood of extraordinary support being provided by the Government of Russia (Baa1, stable) in the event that this were ever required by the company, NCSP's strategic importance now being factored directly into its rating.

However, more positively, NCSP's Ba3 CFR reflects: (i) the company's position as Russia's largest port and its successful transition over the past few years to a more modern provider of bulk cargo and container handling capacity at the Port of Novorossiysk; (ii) its proven ability to grow cargo volumes and maintain tariff levels appropriate to maintaining financial health, but which remains somewhat untested at PTP; (iii) its moderate capital expenditure (capex) plans and possible investment strategy.

The Ba3 CFR further reflects a PDR of Ba3 and a firm-wide LGD assessment of 50%. The national scale rating of Aa3.ru maps to Ba3 on the Moody's Global Rating Scale.

The B1 rating of the Loan Participation Notes and the Loss Given Default assessment of LGD4 reflect the current and anticipated group debt structure, which comprises the borrowers and guarantors pertaining to each of NCSP group's debt instruments.

Although the Russian government still owns 20% of NCSP through the Federal State Property Management Agency, Moody's notes that there is an increased likelihood of the shares being sold in line with previous announcements by the Russian government. Nevertheless, Moody's notes that following the change of ownership of NCSP, the company is 50.1% owned by Novoport Holding Limited ("Novoport"), itself jointly owned by the 100% Russian government owned Transneft and private interests. Furthermore, on 3 May 2011, NCSP reported that the Russian government has been awarded "golden share" rights with veto powers over major changes to the corporate structure of NCSP. While this emphasises the strategic importance of NCSP to Russia, Moody's concludes that the probability of direct extraordinary support being provided is a little less than has previously been embedded within NCSP's ratings given the possibility of a future sale of the Government's shares.

Prior to the acquisition of PTP, NCSP steadily reduced its debt burden by using revenue and cash flow generated from a successful investment and growth strategy at the Port of Novorossiysk. By the year ending December 2010, NCSP had debt of USD321 million and cash and cash equivalents of USD265 million. Consequently, the USD2.15 billion acquisition of PTP, mostly financed by the Sberbank Loan, has increased NCSP's indebtedness significantly. PTP is Russia's largest crude oil exporting port, and with the recent addition of capacity to handle oil products, would be expected to generate good cash flow over the coming years. The seven-year tenor of the Sberbank Loan suggests that a fairly rapid pay-down of the debt is possible. Nevertheless, NCSP is carrying significantly more debt leverage than previously.

Moody's notes that the Sberbank Loan benefits from a guarantee from PTP and has a charge over Novoport's shares in NCSP. Furthermore, as is common with domestic Russian bank loan agreements, a significant proportion of NCSP's revenues need to be paid into Sberbank bank accounts as a condition of the loan. Sberbank has power of attorney over such bank accounts to withdraw funds if NCSP misses a debt payment. Overall, these features provide a level of protection and priority of claim that do not pertain to the Loan Participation Notes, hence the reason for Moody's more significant downgrade of the Loan Participation Notes to B1.

The stable outlook on the ratings reflects Moody's expectation that: (i) NCSP will see continued growth in its business; (ii) the company's capex programmes are appropriate for the expected growth; and (iii) cash flows generated will enable NCSP to deleverage in terms of debt/EBITDA, thereby allowing the company to meet its debt maturities on a timely basis and comply with the financial covenants of the Sberbank loan.

Moody's would consider upgrading NCSP's ratings if it were to see a material significant reduction in the company's expected debt levels, which would be evidenced by a sustained reduction in its debt/EBITDA ratio to below 3.0x, as calculated by Moody's. Alternatively, the rating agency would consider downgrading NCSP's ratings if the company were unable to deleverage in terms of debt/EBITDA, which would be evidenced by this ratio remaining over 4.0x over the medium term.

NCSP's ratings were assigned by evaluating factors that Moody's considers relevant to the credit profile of the issuer, such as the company's (i) business risk and competitive position compared with others within the industry; (ii) capital structure and financial risk; (iii) projected performance over the near to intermediate term; and (iv) management's track record and tolerance for risk. Moody's compared these attributes against other issuers both within and outside NCSP's core industry and believes NCSP's ratings are comparable to those of other issuers with similar credit risk. Other methodologies used include Loss Given Default for Speculative Grade Issuers in the US, Canada, and EMEA, published June 2009.

LAST RATING ACTION & PRINCIPAL METHODOLOGY

Following this rating action, NCSP has the following ratings outstanding with a stable outlook:

CFR (foreign currency) -- Ba3/Aa3.ru

CFR (foreign currency) and PDR -- Ba3

Novorossiysk Port Capital S.A. -- US dollar Loan Participation Notes -- B1

Novorossiysk Port Capital S.A. -- US dollar Loan Participation Notes -- LGD4

Moody's National Scale Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale ratings in that they are not globally comparable to the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".mx" for Mexico. For further information on Moody's approach to national scale ratings, please refer to Moody's Rating Implementation Guidance August 2010 "Mapping Moody's National Scale Ratings to Global Scale Ratings."

PJSC Novorossiysk Commercial Sea Port is company providing stevedoring services at the Port of Novorossiysk, located on Russia's Black Sea coast. For the year ending 31 December 2010, the company had revenues of USD635 million and total assets of USD1.383 billion.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

The rating has been disclosed to the rated entity or its designated agents and issued with no amendment resulting from that disclosure.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the three years preceding the Credit Rating Action. Please see the ratings disclosure page www.moodys.com/disclosures on our website for further information.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

London
Andrew Blease
Senior Vice President
Infrastructure Finance
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Monica Merli
MD - Infrastructure Finance
Infrastructure Finance
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Investors Service Ltd.
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Moody's downgrades Novorossiysk Commercial Sea Port to Ba3 from Ba1; stable outlook (Russia)
No Related Data.
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