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Rating Action:

Moody's downgrades RussNeft's CFR to Caa2, PDR to Caa3-PD; negative outlook

30 Jul 2020

London, 30 July 2020 -- Moody's Investors Service (Moody's) has today downgraded RussNeft PJSC's (RussNeft) corporate family rating (CFR) to Caa2 from Caa1 and probability of default rating (PDR) to Caa3-PD from Caa1-PD. RussNeft's outlook remains negative.

RATINGS RATIONALE

Today's downgrade of RussNeft's PDR to Caa3-PD reflects a significantly increased likelihood of default, including a potential debt restructuring, over the next 12-18 months on the company's financial debt represented mostly by a bank loan of total outstanding $1.17 billion as of year-end 2019, because of the company's persistently very weak liquidity, which has been amplified by the severe drop in oil prices and aggressive liquidity management. The downgrade of RussNeft's CFR to Caa2, one notch above the PDR, reflects Moody's expectation that the recovery rate on the debt in case of default could be higher than 65%.

As of 31 December 2019, the date at which the company's latest IFRS financial statements are available, RussNeft's liquidity comprised cash and cash equivalents of RUB3.0 billion, and operating cash flow of below RUB10 billion which Moody's expects the company to generate over the next 12 months assuming the average oil price for 2020 at $35 per barrel of Brent. This liquidity was insufficient to cover the company's debt maturities of RUB7.2 billion (including lease payments) over the same period, capital spending which Moody's estimates at up to RUB19 billion and dividend payouts of at least $60 million on the company's preferred shares, as anticipated by its dividend policy. Moody's understands that since year-end 2019 the company has failed to procure new debt or other funding sufficient to materially improve its liquidity.

As of year-end 2019, RussNeft's borrowings mostly comprised a loan from Bank VTB, PJSC (Baa3 stable), which represented 92% of the company's debt portfolio. The company was to repay the outstanding $1.17 billion loan in quarterly instalments totalling $91 million per year in 2020-25 and a $625 million final payment in 2026.

RussNeft's Caa2 CFR also factors in (1) Moody's expectation that the company's credit metrics will materially deteriorate over the next 12-18 months because of the drop in oil prices and production cuts under the OPEC+ agreement, with limited potential for recovery over the following 12-18 months; (2) the company's elevated corporate governance risks stemming from significant related-party transactions with other businesses of the Gutseriev family, which controls 46.5% of RussNeft's voting shares; (3) the company's commitment to pay dividends of at least $60 million per year on its preferred shares; (4) its high capital spending, amortisation of received prepayments under oil supply contracts, and significant interest expenses; and (5) the sensitivity of the company's financial metrics to the volatility in oil prices and the Russian rouble exchange rate.

RussNeft's CFR takes into account the company's (1) sizeable reserves and sustainable hydrocarbon production in the absence of OPEC+ restrictions; and (2) historically moderate leverage, robust cash flow metrics and positive free cash flow, although all of these metrics will deteriorate because of low oil prices and production cuts.

RATIONALE FOR THE NEGATIVE OUTLOOK

The negative rating outlook reflects continuing uncertainty over RussNeft's ability to significantly improve its liquidity, further elevating the probability of default on its bank debt, including a potential debt restructuring.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

An upgrade of RussNeft's ratings would be conditional upon the company materially improving its liquidity and liquidity management.

Moody's could downgrade RussNeft's ratings if (1) the company fails to improve its liquidity, increasing the probability of default on its debt obligations, including in the form of debt restructuring which Moody's could view as a distressed exchange, a form of default; or (2) if Moody's estimates that expected losses for the company's creditors in case of default would be higher than those implied by its current rating.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Independent Exploration and Production Industry published in May 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1056808. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Moscow, Russia, RussNeft PJSC (RussNeft) is a medium-sized independent oil and gas producer, with key upstream assets located in Western and Central Siberia, and the Volga-Urals region. As of 31 December 2019, the company had around 1,305 million barrels of oil equivalent (boe) of proved oil and gas reserves in accordance with the Petroleum Resources Management System classification. In 2019, RussNeft produced 7.1 million tonnes (mt) of crude oil and condensate (including 0.5 mt produced by companies of the GEA Group, which is not consolidated by RussNeft) and 2.5 billion cubic metres (bcm) of gas. In the same period, the company generated revenue of RUB187.1 billion and Moody's-adjusted EBITDA of RUB49.7 billion. RussNeft's key shareholders are the Gutseriev family (46.5% of voting shares) and Glencore plc (Baa1 negative, 33% of voting shares), with around 20% of ordinary shares in free float on the Moscow Exchange.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

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
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
Client Service: 44 20 7772 5454

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

Releasing Office:
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No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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