S&P: Russian Oil Pipeline Operator OJSC AK Transnefteproduct 'BB+/ruAA+' Ratings Affirmed; Outlook Negative
July 8, 2009 "Standard & Poor's"
--From our discussions with management and in light of revised terms in Transnefteproduct's offer to repurchase Russian ruble (RUR) 2.5 billion of credit-linked notes (CLNs), we believe that Transnefteproduct's close integration with its parent, Transneft, remains intact.
--We are affirming our 'BB+' rating on Transnefteproduct and removing it from CreditWatch.
--The negative outlook mirrors that on the parent, which is a government-related entity. The outlook therefore reflects that on the sovereign.
MOSCOW (Standard & Poor's) July 7, 2009--Standard & Poor's Ratings Services said today it affirmed its 'BB+' long-term corporate credit rating on Russia-based oil pipeline operator OJSC AK Transnefteproduct and removed it from CreditWatch, where it was placed with negative implications on May 27, 2009. The outlook is negative.
At the same time, the 'ruAA+' Russia national scale rating was affirmed and removed from CreditWatch.
"The rating affirmation reflects our opinion that Transnefteproduct continues to enjoy a high degree of support from its parent OAO AK Transneft (BBB/Negative/--)," said Standard & Poor's credit analyst Andrey Nikolaev.
We put Transnefteproduct on CreditWatch with negative implications on May 27, 2009, following its announcement of a tender offer and consent solicitation relating to its RUR2.5 billion (about $80 million) CLN issue. At that time, we believed this offer could have been an indication of loosening integration between the two companies and consequently a lower degree of parental support.
However, our discussions with the managements of Transneft and Transnefteproduct and the subsequent revision of the terms of the tender offer have led us to believe that the close ties between both companies are still intact.
"In our view, Transneft still closely controls Transnefteproduct's financial and strategic decision-making," said Mr. Nikolaev. "This is demonstrated, for example, by the centralization of accounting for both entities at TransneftFinance, a subsidiary of Transneft."
Consequently, we continue to follow a top-down rating approach to assess Transnefteproduct's credit quality, notching down two levels from the rating on Transneft to reflect expected parental support.
We currently assess Transnefteproduct's stand-alone credit quality at 'B+', reflecting our view of the company's business risk profile as weak and its financial risk profile as aggressive. The business risk profile is constrained by Transnefteproduct's position as a small (relative to its parent), mainly commercial operator competing with other transportation providers (notably rail operators). Transnefteproduct's financial risk profile reflects our opinion of the company's fairly weak debt metrics and the likelihood of negative free cash flows if, for example, the company were to embark on new development projects, such as the South pipeline.
The outlook is negative because our outlook on the parent, Transneft, is negative, which in turn reflects that on the principal shareholder, the Russian Federation (foreign currency BBB/Negative/A-3; local currency BBB+/Negative/A-2; Russia national scale 'ruAAA').
Company — Transnefteproduct
Full nameopen joint stock company Transnefteproduct