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Rating Action:

Moody’s rates Harvest’s notes gteed by Korea National Oil Corporation A1; downgrades existing sr unsec’d notes to Ba3

06 May 2013

Approximately US$1.1 billion of debt affected

NOTE: On July 03, 2013, the press release was revised as follows: Correct the headline from ‘Moody’s rates Harvest’s gteed notes A1; downgrades ungteed notes to Ba3’ to ‘Moody’s rates Harvest’s notes gteed by Korea National Oil Corporation A1; downgrades existing sr unsec’d notes to Ba3.’ Correct the first paragraph from ‘Moody's Investors Service assigned an A1 rating to Harvest Operations Corp.'s (Harvest) proposed US$600 million guaranteed senior unsecured notes, and downgraded the existing US$500 million unguaranteed senior unsecured notes due 2017 to Ba3 from Ba2. The Ba2 Corporate Family Rating (CFR) and Ba2-PD Probability of Default Rating (PDR) were affirmed. Harvest's Speculative Grade Liquidity rating was downgraded to SGL-4 from SGL-3. The rating outlook for the A1 rated guaranteed bonds is stable. The rating outlook for the CFR, PDR and Ba3 rated unguaranteed bonds was changed to negative from stable.’ to ‘Moody's Investors Service assigned an A1 rating to Harvest Operations Corp.'s (Harvest) proposed US$600 million senior unsecured notes guaranteed by Korea National Oil Corporation (KNOC, A1 stable), and downgraded the existing US$500 million senior unsecured notes due 2017 to Ba3 from Ba2. The Ba2 Corporate Family Rating (CFR) and Ba2-PD Probability of Default Rating (PDR) were affirmed. Harvest's Speculative Grade Liquidity rating was downgraded to SGL-4 from SGL-3. The rating outlook for the A1 rated bonds guaranteed by KNOC is stable. The rating outlook for the CFR, PDR and Ba3 rated bonds due 2017 was changed to negative from stable.’ In the Ratings Rationale section, third paragraph, second sentence, correct ‘The existing unsecured notes are rated Ba3,’ to ‘The existing notes due 2017 are rated Ba3.’ In the RATINGS RATIONALE section, correct the fifth paragraph from ‘The guaranteed ratings will move up or down in accordance with the ratings of KNOC’ to ‘The ratings that reflect the KNOC guarantee will move up or down in accordance with the ratings of KNOC.’

Toronto, May 06, 2013 -- Moody's Investors Service assigned an A1 rating to Harvest Operations Corp.'s (Harvest) proposed US$600 million senior unsecured notes guaranteed by Korea National Oil Corporation (KNOC, A1 stable), and downgraded the existing US$500 million senior unsecured notes due 2017 to Ba3 from Ba2. The Ba2 Corporate Family Rating (CFR) and Ba2-PD Probability of Default Rating (PDR) were affirmed. Harvest's Speculative Grade Liquidity rating was downgraded to SGL-4 from SGL-3. The rating outlook for the A1 rated bonds guaranteed by KNOC is stable. The rating outlook for the CFR, PDR and Ba3 rated bonds due 2017 was changed to negative from stable.

The proposed notes will be unconditionally guaranteed by Korea National Oil Corporation (KNOC, A1 stable) with the proceeds used to refinance Harvest's US$400 million bridge loan. We assume the balance of the proceeds will ultimately be contributed to the redemption of Harvest's remaining subordinated convertible debentures.

"The change in Harvest's outlook to negative reflects declining production, continued negative EBITDA contribution from its refinery and an expected increase in leverage as the company funds negative free cash flow with debt in 2013," said Terry Marshall, Moody's Senior Vice President. "We expect that Harvest will require an increase in its $800 million revolver or further cash injections from Korea National Oil Corporation in 2014."

Downgrades:

..Issuer: Harvest Operations Corp.

....Senior Unsecured Regular Bond/Debenture Oct 1, 2017, Downgraded to Ba3 from Ba2

....Senior Unsecured Regular Bond/Debenture Oct 1, 2017, Downgraded to LGD4, 64 % from LGD3, 49 %

Assignments:

..Issuer: Harvest Operations Corp.

....Guaranteed Senior Unsecured Regular Bond/Debenture, Assigned A1; outlook stable on these notes only

Outlook Actions:

..Issuer: Harvest Operations Corp.

....Outlook, Changed To Negative From Stable

Affirmations:

..Issuer: Harvest Operations Corp.

.... Corporate Family Rating, Affirmed Ba2

.... Probability of Default Rating, Affirmed Ba2-PD

.... Speculative Grade Liquidity Rating, Downgraded to SGL-4 from SGL-3

RATING RATIONALE

Harvest's Ba2 CFR reflects its stand-alone credit profile of B1 and the strong support from its 100% parent, KNOC, for which we attribute two notches of rating uplift. The B1 stand-alone credit profile is constrained by very high leverage on proved developed (PD) reserves, production and retained cash flow, considerable capital requirements to develop its oil sands reserves, and the high capital expenditure requirements and negative EBITDA contribution from its 115,000 barrels per day downstream refinery in Newfoundland. The rating favorably considers Harvest's 66% oil- and liquids-weighted production platform, and sizeable PD and total proved reserves base.

The SGL-4 Speculative Grade Liquidity rating reflects weak liquidity. We expect Harvest to consume negative free cash flow of about C$250 million through the first quarter of 2014, which will completely use up the availability on its C$800 million revolver due April, 2016. The company will need to access unidentified external liquidity to fund remaining 2014 negative free cash flow of about C$200 million . We expect Harvest to breach its total debt to EBITDA covenant (not greater than 3.75x on March 31, 2013 and 3.5x thereafter) in 2014, absent renegotiation. Harvest should remain in compliance with its other financial covenants. Harvest has some ability to sell assets to raise additional funds to support its liquidity. KNOC has provided significant financial support to Harvest since acquiring it in December 2009. While we anticipate that KNOC will continue to support Harvest, this is not factored into the SGL rating, which we consider on a standalone basis.

The proposed US$600 million guaranteed senior unsecured notes are rated A1, reflecting the guarantee of KNOC. The existing notes due 2017 are rated Ba3, reflecting the priority ranking of the company's secured C$800 million revolving credit facility and limited cushion provided by the subordinated intercompany loan of about C$170 million.

The negative outlook reflects declining production and reserves, continued negative EBITDA contribution from the refinery, increasing debt and weak liquidity. The ratings could be downgraded if the refinery continues to consume cash and/or upstream production continues to decline, such that E&P debt to production does not appear to be sustainable below US$40,000 per boe and E&P debt to proved developed reserves rises above US$14 per boe. The non-guaranteed ratings could also be downgraded on a change in our view of the support provided by KNOC. Restoration of the outlook to stable will be dependent upon a clear view that the refinery will not continue to consume cash and the Black Gold oil sands property is poised to produce as expected. The ratings could be upgraded if Harvest decreases its E&P debt to production below US$27,000 per boe and E&P debt to proved developed reserves below US$9 per boe through either an increase in its production and reserve profile or a reduction in debt. An upgrade would also be contingent on the refinery no longer consuming cash flow.

The ratings that reflect the KNOC guarantee will move up or down in accordance with the ratings of KNOC.

The principal methodology used in this rating was the Global Independent Exploration and Production Industry Methodology published in December 2011. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Harvest, based in Calgary, Alberta is a wholly-owned subsidiary of Korea National Oil Company. Harvest produces about 50,000 barrels of oil equivalent per day, all in Canada, and has a proved reserve base of 218,000 Mboe (all reserves and production volumes are net of royalties unless noted otherwise). Harvest also owns a 115,000 bbl/day refinery in Come-By-Chance, Newfoundland.

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.

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.

Terry Marshall
Senior Vice President
Corporate Finance Group
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
(416) 214-1635

Donald S. Carter, CFA
MD - Corporate Finance
Corporate Finance Group
(416) 214-1635

Releasing Office:
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
(416) 214-1635

Moody’s rates Harvest’s notes gteed by Korea National Oil Corporation A1; downgrades existing sr unsec’d notes to Ba3
No Related Data.
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