London, 07 November 2017 -- Moody's Investors Service (Moody's) has today upgraded to Ba3 from B1
the corporate family rating (CFR) and to Ba3-PD from B1-PD
the probability of default rating (PDR) of Borets International Ltd (Borets)
. Concurrently, Moody's upgraded Borets' senior unsecured
notes issued by Borets Finance DAC, a wholly owned subsidiary of
Borets incorporated under the laws of Ireland, and guaranteed by
the parent company and its principal Russian subsidiary, Borets
Company, to Ba3 (LGD4) from B1 (LGD4).
The outlook on the ratings has been changed to stable from positive.
"Our decision to upgrade Borets reflects a strengthening in its operating
profile, as well as an improvement in liquidity following placement
of the new senior unsecured notes earlier this year," says Julia
Pribytkova, a Vice-President-Senior Analyst at Moody's.
RATINGS RATIONALE
Borets maintained a relatively strong financial profile notwithstanding
the low oil price environment in late 2014-15. Whilst the
company's international sales halved in 2016 compared with the 2014
level, its total revenue in rouble terms continued to grow,
driven by a high-margin rental business which will contribute together
with services around 44% to revenue in 2017. Borets increased
its net debt over 2014-17 to finance investment into its own rental
business (in 2014-17 the company invested more than $180
million and plans to continue to invest up to $50 million a year,
depending on demand), however an increase in the EBITDA helped Borets
to bring down leverage measured by Moody's adjusted net debt/EBITDA
to 2.6x at end-June 2017 (2015: 3.8x,
2016: 2.7x).
Moody's notes that Russia's oil producers who are Borets'
major customers (PJSC Oil Company Rosneft accounts for 30% of Borets'
total sales) have retained strong financial profiles as they benefit from
dollar-denominated export revenues while their cost base is in
weakened roubles. Unlike global peers at times of low oil prices,
Russian oil majors did not reduce their spend on conventional oilfield
services in rouble terms. Local providers of equipment and services
such as Borets remain better positioned to meet local demand thanks to
their rouble cost-base. Borets' international business
has somewhat recovered after weak 2015-2016 and will contribute
around a quarter of total revenue in 2017. The company has lost
a large chunk of its US sales and shifted focus to other countries such
as Colombia, Brazil, Middle East and the Gulf countries.
Borets' Ba3 rating will remain constrained by 1) the company's modest
scale by global standards; 2) its focus on a single product line
(ESP), and, to a lesser extent 3) its limited geographic and
customer diversification. Additionally, Moody's notes the
company's exposure to the currency mismatch between its revenues (around
three quarters of which are in roubles) and mostly US-dollar-denominated
debt. As a result, a devaluation of the local currency would
trigger a substantial increase in leverage. Modest maintenance
capex requirements of around $20 million a year, scalable
rental business investment plan, and a large and relatively diversified
client base help to mitigate elevated foreign exchange risk at Borets.
The rating positively takes into account (1) the company's leading
position in the niche ESP market, with long-standing customer
relationships; (2) a large installed base, with a growing portion
of revenues derived from the replacement and servicing of existing ESPs;
(3) active development of the rental business and new technologies.
Moody's also positively acknowledges Borets' adherence to sound corporate
governance standards under the existing shareholding structure.
Moody's notes that as a result of the bond issuance in April 2017
Borets has accumulated sizeable cash balances of more than $100
million, which the company intends to use for the repayment of indebtedness
including the $133 million outstanding senior unsecured notes due
in September 2018.
RATIONALE FOR STABLE OUTLOOK
The stable outlook on the ratings reflects Moody's expectation that Borets
will continue to maintain 1) robust operating and financial profile with
leverage measured by Moody's adjusted debt/EBITDA below 3.0x,
and 2) good liquidity, timely addressing refinancing risks.
WHAT COULD CHANGE THE RATINGS UP/DOWN
There is a limited potential for upgrade in the next 12-24 months
given the company's size, scale of operations, business
profile, absolute amount of debt and foreign exchange exposure.
Moody's would consider downgrading Borets if (1) its competitive
position deteriorated, resulting in a decline in revenue in rouble
terms and weakening of profitability; and/or (2) there is a material
increase in leverage, as measured by adjusted debt/EBITDA,
sustainably above 4.0x. Any concerns about the company's
liquidity may also pressure the rating.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Global Oilfield Services
Industry Rating Methodology published in May 2017. Please see the
Rating Methodologies page on www.moodys.com for a copy of
this methodology.
Borets International Ltd domiciled in UAE specialises in the design and
manufacture of electric submersible pumps (ESP) for the oil sector and
the provision of related services including rental of equipment.
Borets derives three quarters of its revenue from Russia and actively
exports its products to the Americas, Middle East and the Gulf countries;
services and rental of equipment contribute more than 40% to the
company's revenue. Borets has 11 manufacturing facilities,
predominantly in Russia, and a service network globally.
In the last twelve months ended 30 June 2017, Borets generated $546
million in sales and $152 million of Moodys' adjusted EBITDA.
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.
Julia Pribytkova
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
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:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
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United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
