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S&P: Russian Oil Pipeline Operator Transnefteproduct Outlook Stable On Revision of Transneft Outlook; Affirmed At 'BB+/ruAA+'

December 22, 2009 Standard & Poor's
MOSCOW (Standard & Poor's) Dec. 22, 2009--Standard & Poor's Ratings Services said today that it had revised its outlook on Russian oil product pipeline operator OJSC AK Transnefteproduct to stable from negative. The 'BB+' long-term corporate credit and 'ruAA+' Russia national scale ratings were affirmed.

"The outlook revision primarily reflects the outlook revision on Transnefteproduct's parent, OAO AK Transneft (BBB/Stable/--)," said Standard & Poor's credit analyst Andrey Nikolaev.

We also factor into the rating ongoing integration of the two companies, notably the fact that Transnefteproduct substituted its external debt with funds from Transneft and doesn't expect to borrow externally in the future. Finally, we take into consideration Transnefteproduct's healthy financial performance in 2009.

The ratings mainly reflect our view of a relatively high likelihood of support from Transneft. The differential between the ratings on Transnefteproduct and its parent Transneft is explained by the incomplete, but increasing, integration of the two companies and Transnefteproduct's weaker stand-alone credit profile, which we assess as 'B+'. Transneft's ability to support Transnefteproduct is reflected in our investment-grade rating on Transneft.

We currently assess Transnefteproduct's stand-alone credit profile at 'B+', reflecting our opinion 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 improving debt metrics and, at the same time, 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 stable outlook mirrors that on Transneft, which in turn reflects that on its principal shareholder, the Russian Federation (foreign currency BBB/Stable/A-3; local currency BBB+/Stable/A-2; Russia national scale 'ruAAA')," said Mr. Nikolaev.

In the medium term, we cannot rule out a decrease in the differential from two notches to one notch between the ratings on Transnefteproduct and those on its parent, Transneft. A decreased differential would depend on:
• Transnefteproduct's continued reliance on intragroup financing rather than external debt to finance its activities;
• A track record of further integration between the two companies; and
• A stronger stand-alone credit profile for Transnefteproduct.

A stronger stand-alone credit profile would depend on Transnefteproduct's long-term investment ambitions and the potential for sizable debt increases from the "South" pipeline project.
Company — Transnefteproduct
  • Full name
    open joint stock company Transnefteproduct
  • Registration country
    Russia
  • Industry
    Transportation