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Rating Action:

Moody's upgrades Sovcomflot's bond rating to Baa3, stable outlook

22 Jun 2021

London, 22 June 2021 -- Moody's Investors Service (Moody's) has today upgraded to Baa3 from Ba2 the rating of the backed senior unsecured debt issued by SCF Capital Designated Activity Company, an indirect wholly owned subsidiary of Sovcomflot PAO (SCF) incorporated in Ireland. Moody's also upgraded SCF's Baseline Credit Assessment (BCA) to ba2 from ba3, and assigned a Baa3 issuer rating. Moody's is withdrawing SCF's Ba1 corporate family rating CFR) and its Ba1-PD probability of default rating (PDR). The outlook remains stable.

A full list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

Moody's upgrade of SCF's ratings to Baa3 reflects the growing importance of SCF to the Russian government from its role in serving as critical infrastructure for highly strategic large-scale energy projects in the Arctic and Far East regions, significant development potential of which is increasingly viewed by the state as a key strategic priority for the country. This underpins SCF's strengthened standalone credit profile, while reinforces Moody's assessment of strong state support, even taking into account the recent IPO, providing solid grounds for the two notch uplift the debt instrument and issuer ratings receive under the GRI methodology. The agency's confidence that the strong level of state support assumed in the ratings would directly benefit the holding company is the basis for no longer considering structural subordination to be a factor thereby removing the notching that had previously existed for the senior unsecured instrument rating.

One of the key drivers for this action is Moody's decision to upgrade SCF's BCA to ba2 from ba3 reflecting the improvement in the company's financial and business profiles supported by its consistent focus on increasing diversification into the stable and high-margin industrial segment (liquefied natural gas [LNG] and liquefied petroleum gas [LPG] shipping and offshore services), which reduces the group's overall exposure to the volatility in the conventional tanker market. Thus, the segment's contribution to SCF's total TCE revenue (total revenue minus voyage costs and commissions) reached around 50% in 2020 (around 30% in 2016) and the company strategically aims to grow the share of this segment to 70% by 2025 capitalizing on its global leadership in seaborne transportation in harsh environments, which underpins its unique domestic competitive positioning and ensures involvement in major Russian LNG projects with strong growth potential and significant state support. SCF's development plan is, in particular, backed by its strong backlog of very long-term contracts, which expanded to a record $23.5 billion (including $9.7 billion attributable to the company under its JVs) from around $9 billion in 2016.

The growing share of repeat business with low contract renewal risks has enhanced SCF's earnings visibility and reduced the historical volatility in its financial profile providing the growing buffer against market downturns. Moreover, although SCF's fairly extensive debt-funded investment program is set to pickup starting 2022 with a peak in 2023, all the company's upcoming investments in new vessels are already secured by long-term contracts with fixed profitability, thus reducing the related financial risks. Despite the aggressive $225 million of dividends to be paid in 2021 after the IPO, Moody's also expects SCF to pursue a fairly prudent financial policy sticking to a more conservative approach to shareholder distributions in the following years, which it will balance with the investment programme to remain within its internal leverage target set at below 4.0x reported net debt/EBITDA. Overall, Moody's expects SCF to retain sound financial profile with its adjusted debt/EBITDA comfortably below 4.5x through the market cycles.

SCF's BCA of ba2 continues to reflect its (1) leading position in the tanker market globally and in Russia; (2) relatively modern, diversified fleet and solid customer base; and (3) sound liquidity, with a comfortable debt maturity profile, largely prefunded contracted investment program, as well as historically prudent liquidity management with established access to long-term international bank and capital funding, reinforced by the IPO and the recent partial refinancing of its $900 million Eurobond due in 2023 through a new $430 million notes due 2028.

SCF's position as a majority state-owned company means that Moody's rates the company under its government related issuer (GRI) methodology. According to this methodology, SCF's Baa3 rating is driven by a combination of (1) its BCA of ba2, a measure of its standalone credit strength; (2) the Government of Russia's bond rating of Baa3 with a stable outlook; (3) the low default dependence between SCF and the Russian government; and (4) the strong probability of state support to the company we have assigned in the event of financial distress.

While the public listing of a portion of SCF's common equity in October 2020 will diversify its shareholder base, the government retained a majority stake with its direct ownership in the company reducing to 82.8% from 100%. Although the government may further reduce its stake under the privatisation plan that envisages the sale of 25% less one share in SCF by 2022, Moody's does not expect a potential further sale of a non-blocking stake to have any significant effect on the company's operations or reduce the degree of control of the state over SCF. The agency' assessment of strong state support is further reinforced by the government's decision to recapitalise the company, despite increased pressure on the government budget because of the coronavirus pandemic, which, in particular, reflects the growing importance of the company because of its key role in servicing major strategic energy projects in the country.

STRUCTURAL CONSIDERATIONS

Although a large amount of SCF's debt (approximately 70%) is raised by the company's operating subsidiaries and is secured by vessels, Moody's is no longer applying notching for structural subordination reflecting our assessment that given the strong GRI support assumption, it is our expectation that support would be provided at the level of the holding company offsetting the risk of having other debt in the capital structure benefiting from security. In addition, the agency takes into account the fact that the issuer's unencumbered asset value significantly exceeds the amount of the bond.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

Moody's regards the coronavirus pandemic as a social risk under its ESG framework, given the substantial implications for public health and safety.

In terms of environmental risks, SCF's operations are subject to laws and regulations aimed at protecting the environment and reducing pollution. The global shipping industry is highly scrutinised for fuel/carbon emissions and ballast water discharge, and faces increasing regulations to curb these risks, which may require substantial investments to overhaul vessels and change operating procedures to comply.

SCF remains a state-controlled company. The company's corporate governance risk is mitigated by the fact that it demonstrates a good level of public information disclosure, while four out of 11 members of its board of directors are independent. The recently completed IPO further supports the company's transparency. Moody's assessment of corporate governance risks also factors in SCF's history of aggressive debt-funded growth investments. The agency, however, expects the company to stick to a prudent financial policy balancing its investment programme and shareholder distributions.

OUTLOOK

The stable outlook on SCF's rating reflects Moody's expectation that the company will continue to benefit from the strong state support, while its financial performance and liquidity will remain comfortable through the cycle, supported by the consistent development of the stable industrial segment and adherence to its balanced financial policy. In particular, the agency expects the company's adjusted debt/EBITDA to remain below 4.5x, retained cash flow/net debt above 15% and adjusted funds from operations/interest above 3.75x.

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

There is currently no potential for an upgrade of SCF's rating because the rating is positioned at the level of the sovereign bond rating. An upgrade of the sovereign bond rating could put positive pressure on SCF's rating, if the company's BCA were raised, assuming no change to support and dependence factors. Positive pressure on the company's BCA could develop if SCF continues to grow its industrial business as planned, while proving its ability to sustain stronger credit metrics through the market and investment cycles, where Moody's-adjusted debt/EBITDA trends towards 3.5x and below, retained cash flow/net debt above 20%, and funds from operations/interest above 4.0x, while liquidity remains sound.

Moody's could downgrade SCF's rating if it were to downgrade Russia's sovereign rating or the company's leverage rises above the agency's expectations on a sustained basis as a result of (1) a new major downturn in the conventional tanker market; (2) any disruptions in the industrial segment leading to its lower-than-expected contributions to the company's earnings and cash flow generation; or (3) a significant step-up in SCF's investment spending or aggressive shareholder distributions. A substantial deterioration in SCF's liquidity could also lead to a rating downgrade.

LIST OF AFFECTED RATINGS:

..Issuer: SCF Capital Designated Activity Company

Upgrades:

....BACKED Senior Unsecured Regular Bond/Debenture, Upgraded to Baa3 from Ba2

Outlook Actions:

....Outlook, Remains Stable

..Issuer: Sovcomflot PAO

Assignments:

.... LT Issuer Rating, Assigned Baa3

Withdrawals:

.... LT Corporate Family Rating, Withdrawn , previously rated Ba1

.... Probability of Default Rating, Withdrawn , previously rated Ba1-PD

Outlook Actions:

....Outlook, Remains Stable

PRINCIPAL METHODOLOGY

The methodologies used in these ratings were Shipping published in June 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1276306, and Government-Related Issuers Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Headquartered in St. Petersburg, Russia, Sovcomflot PAO is a leading international shipping group involved in the transportation of oil, oil products and LNG/LPG, as well as provision of offshore services with particular focus on operating in harsh environments. The company is one of the world's leading energy-shipping companies by deadweight tonnage including the largest fleet of ice-class vessels and serves the large strategic energy projects in Russia accounting for around 18% of all seaborne hydrocarbons exports from the country. For the 12 months that ended 31 March 2021, the company generated revenue of $1.5 billion and Moody's-adjusted EBITDA of $758 million.

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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1263068.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Ekaterina Lipatova
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

David G. Staples
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

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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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