Rating Action: Moody's confirms Sovcomflot's ratings, outlook negative
Global Credit Research - 01 Apr 2015
$800 million of rated debt affected
London, 01 April 2015 -- Moody's Investors Service has today confirmed Sovcomflot JSC's (SCF) Ba2 corporate family rating (CFR), Ba2-PD probability of default rating (PDR), B1 issuer rating, and B1 senior unsecured rating of the $800 million Eurobond issued by its guaranteed 100% indirect subsidiary SCF Capital Limited. The outlook on the ratings is negative. This rating action concludes the review for downgrade initiated on 23 December 2014.
The confirmation of SCF's ratings by Moody's reflects the following developments: 1) improvements in the company's operating environment, with average Time Charter Equivalent (TCE) rates increasing by 20% in the second half of 2014, with further strengthening expected in 2015 and the first half of 2016; and 2) the company's improved performance, as reflected in its robust 2014 EBITDA year-on-year growth and strengthened leverage and coverage metrics. During the course of 2014 SCF continued to enhance its fleet by adding three vessels operating under long--term charter contracts with OJSC Gazprom (Ba1 negative) and PetroChina International (not rated). Whilst SCF is 100% owned by the Russian state, its operations are extraterritorial, with approximately 70% of its revenues originating from global oil and gas majors. SCF's assets are located in various jurisdictions and can be easily accessible by creditors in case of distress. In the agency's view these factors provide a degree of insulation of the company's credit profile from that of Russia.
SCF's operations benefit from: 1) a high degree of geographic diversification, 2) good visibility of future revenues thanks to a predominant proportion of its fleet operating under long-term contracts with reputable clients such as global oil and gas majors; 3) diversified fleet: SCF operates in the gas transportation and offshore segments, as well as in the conventional tanker business. In addition, SCF owns specialised ice-class vessels (including Arctic shuttle tankers), which are able to service clients in harsh climate conditions. Only about one-third of SCF's business is exposed to the highly volatile spot tanker market.
Conversely, SCF's CFR factors in (1) significant volatility of the marine transportation market in which the company operates; (2) high level of annual capex driven by the company's programme of new vessel construction in 2015-17; and (3) potential effect of Russia's weakening economic profile and heightened geo-political event risk resulting from the conflict in Ukraine on SCF's operating performance and its position in the international market.
SCF's CFR of Ba2 is determined in accordance with Moody's Government-Related Issuer (GRI) rating methodology and incorporates the following inputs: (1) baseline credit assessment (BCA), a measure of standalone credit strength, of b2; (2) the Ba1 sovereign rating of the Russian government with negative outlook; (3) the low default dependence between SCF and the government; and (4) the strong probability of state support being provided to the company in the event of financial distress.
SCF conducts its operations in US dollars, which matches the currency of its debt. Moody's estimates the company's projected cash flow, which is largely contracted, to cover its operating costs, maintenance capex and debt repayments up until mid 2017, when the company's Eurobond matures. The company plans to invest heavily into the construction of 10 new vessels, fully contracted for long-term employment, over the course of 2015-17, subject to availability of the respective financing. In December 2014 SCF obtained a $319 million 10-year senior secured project finance loan from a consortium of international banks (with ING Bank N.V (A2, on review for upgrade), acting as agent) to finance the construction of two ordered LNG vessels for Shell Oil Company (Aa2 stable) in January and April 2015. As of end- 2014, SCF had around $285 million in cash and $447 million in committed undrawn credit facilities maturing beyond the next 12 months. Moody's notes that maturities of debts at the operating subsidiaries secured by vessels can be typically rolled over, the amount of such rollovers being subject to the age and the current market value of the underlying assets. The agency will monitor SCF's progress on the refinancing of its 2017 bond maturity.
SCF's guaranteed $800 million bond maturing in October 2017 is rated B1, two notches below the CFR. This reflects Moody's opinion that senior unsecured debt represented by the bond is structurally and contractually subordinated to approximately $2.0 billion of the company's debt located at the level of operating companies and secured by the pledge of assets (vessels).
The negative outlook on the ratings is consistent with the outlook on the sovereign rating of Russia which is the main support provider for the company as part of Moody's GRI methodology.
WHAT COULD CHANGE THE RATINGS UP/DOWN
Upward pressure on SCF's ratings is unlikely at present, given the negative outlook, reflecting the linkages to the rating of the sovereign. Sustainable deleveraging could place positive pressure on the BCA, however the final rating would likely remain constrained by the sovereign rating.
There could be negative pressure on SCF's ratings if (1) the company's liquidity weakened; (2) its adjusted debt/EBITDA rose above 6.5x and adjusted FFO interest coverage declined below 3.0x on a sustained basis; or (3) there were negative changes in the company's parent, the government of Russia, creditworthiness. Moody's taking a view that the willingness and probability of the government providing extraordinary support to the company has decreased, would have a negative effect on the rating.
The principal methodology used in these ratings was Global Shipping Industry published in February 2014. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009 and the Government-Related Issuers methodology published in October 2014. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
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