S&P: Russian Oil Product Transporter Transnefteproduct Upgraded To 'BB+/ruAA+' On Closer Ties With Parent; Outlook Negative
April 30, 2009 "Standard & Poor's"
MOSCOW (Standard & Poor's) April 29, 2009--Standard & Poor's Ratings Services said today that it had raised its long-term corporate credit rating on Russian oil product pipeline company OJSC AK Transnefteproduct (TNP) to 'BB+' from 'BB-'. The Russia national scale rating was raised to 'ruAA+' from 'ruAA'. The outlook is negative, mirroring that on the parent, OAO AK Transneft (BBB/Negative/--).
"The upgrade is based on our perception that TNP is now more closely integrated with its 100% shareholder and our expectation of the relatively high likelihood of extraordinary support from Transneft," said Standard & Poor's credit analyst Andrey Nikolaev.
We now follow a top-down approach in assessing Transnefteproduct's credit quality and notch down two notches from the rating on Transneft to reflect the expected support
We currently assess TNP's stand-alone credit quality at 'B+', reflecting the company's position as a relatively small and mainly commercial operator competing with other transportation providers (notably rail), in addition to fairly weak debt metrics and possible further negative free cash flow, assuming the company embarks on new development projects, such as the South pipeline.
Construction of the North project over 2005-2008 has pushed Transnefteproduct's gross debt to Russian ruble (RUR) 22 billion as of Sept. 30, 2008, translating into relatively weak adjusted debt to EBITDA of 2.9x. As the construction is now over and the capacity utilization of the new route is gradually increasing, we expect free operating cash flow (FOCF) to be positive for fourth-quarter 2008 and in 2009. In the near term, TNP's financial metrics will be pressured by ruble devaluation because most of TNP's debt is denominated in U.S. dollars, while revenues are in rubles.
Key credit strengths are Transnefteproduct's position as one of the key transportation vehicles for Russia's oil product exports, the country's flexible regulatory regime, and TNP's adequate liquidity.
As of March 31, 2009, Transnefteproduct's short-term debt of RUR2.5 billion related to credit linked notes maturing in October 2009 was more than offset by RUR8.5 billion in cash.
The outlook is negative because the outlook on its parent Transneft is negative. Transneft's outlook mirrors that on the Russian Federation (foreign currency BBB/Negative/A-3; local currency BBB+/Negative/A-2; Russia national scale 'ruAAA').
"Given our top-down approach on TNP, we would likely downgrade TNP in case of a downgrade of Transneft," said Mr. Nikolaev.
In the medium to long term, a decrease in the differentiation between the ratings on TNP and those on its parent from two notches to one notch is not excluded, but would depend on an increased share of intragroup and guaranteed debt from Transneft and/or a significant strengthening of TNP's stand-alone credit profile.
The latter would depend on meaningful improvement in profit generation and deleveraging in 2009 on the back of higher capacity utilization of the North pipeline and on further tariff increases without compromising volumes transported. The company's long-term investment ambitions and the potential for important debt increases from the South pipeline project would also be an important factor.
Company — Transnefteproduct
Full nameopen joint stock company Transnefteproduct