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Russian Oil Company TNK-BP 'BBB-' Rating Put On CreditWatch Positive On Potential Acquisition By Rosneft

October 25, 2012 Standard & Poor's
• On Oct. 22, 2012, Russia-based Oil Company Rosneft OJSC announced its intention to buy a 50% stake in TNK-BP International Ltd. from BP PLC, and another 50% stake from Russian consortium AAR.
• If Rosneft were to become TNK-BP's controlling shareholder, we would likely align the rating on TNK-BP with that on Rosneft.
• We are therefore placing our 'BBB-' and 'A-3' ratings on TNK-BP on CreditWatch with positive implications.
• We expect to resolve the CreditWatch after determining whether the transaction will proceed and the impact it could have on Rosneft and, in turn, on TNK-BP.

LONDON (Standard & Poor's) Oct. 24, 2012--Standard & Poor's Ratings Services said today it had placed its 'BBB-' long-term and 'A-3' short-term corporate credit ratings on Russian vertically integrated oil company TNK-BP International Ltd. on CreditWatch with positive implications.

The rating actions follow an announcement by Russian state-controlled Oil Company Rosneft OJSC that it had agreed in principle to purchase a 50% stake in TNK-BP from BP PLC for $17.1 billion in cash and 12.84% of treasury shares. Rosneft also intends to buy another 50% of TNK-BP from the Russian consortium AAR for $28 billion.

The CreditWatch placement reflects our view that if Rosneft were to become a controlling shareholder in TNK-BP, we would likely align the rating on TNK-BP with that on Rosneft. In addition, the rating on TNK-BP would depend on the relative status of TNK-BP's debt in the new group vis-à-vis that of Rosneft's. If Rosneft were to purchase only 50%, at least initially, we would also need to assess the impact of the new dual shareholding structure on TNK-BP's financial policy.

Our ratings on Rosneft are on CreditWatch Positive because of a potential increase in the likelihood of extraordinary state support, which could outweigh the risks to the group's financial risk profile (notably leverage and liquidity). The enlarged Rosneft would take on a more prominent role in Russia's oil industry, in our view, and it would become a clear leader in terms of reserves and production, with unique access to certain new projects (such as offshore) and majority government control. This could increase the government's incentive to provide extraordinary support if needed, which may result in a one-notch uplift to the rating in line with our methodology for government-related entities.

Nevertheless, the stand-alone credit quality of the enlarged entity will likely be lower than that of Rosneft or TNK-BP before the transaction. The acquisition will increase asset size and diversification and may enhance certain operational synergies. However, our assessment of business risk is unlikely to be higher than "satisfactory" because most of the assets are in Russia and still subject to country risks, notably a heavy and potentially changing tax burden and the government's heavy dependence on the oil and gas sector to balance its budget. The financial risk profile will likely no longer be compatible with an "intermediate" assessment because of the likelihood of additional debt to fund the transaction and potential risks to liquidity should TNK-BP be fully incorporated into Rosneft.

If Rosneft were to buy only 50% of TNK-BP and did not achieve control, we would need to assess the impact of the new dual shareholding structure on TNK-BP's financial policy, notably whether it would have a bearing on TNK-BP's dividend and leverage targets. This could for instance arise should one or both of the shareholders insist on a higher dividend payout than is currently the case. The transaction, should it proceed, will resolve long-term issues among TNK-BP's current shareholders, AAR and BP.

Our rating on TNK-BP reflects our assessment of the company's "satisfactory" business risk profile and "intermediate" financial risk profile. Key credit strengths include the company's large export-focused upstream operations, vertical integration, sound profitability, better free cash flow generation than peers', and currently prudent financial policies and gearing target of 25%-35%. These strengths are significantly constrained, in our view, by risks related to operating in Russia, notably heavy taxes, cost inflation, and a weak institutional environment.

We expect to resolve the CreditWatch on TNK-BP after determining whether the transaction will proceed and the impact it could have on Rosneft. If Rosneft becomes the sole owner of TNK-BP, our rating on TNK-BP will most likely be aligned with that on Rosneft. If Rosneft were to become a 50% shareholder, we would assess the possible impact on TNK-BP's financial policy.
Company — RN Holding
  • Full name
    Open Joint Stock Company RN Holding
  • Registration country
    Russia
  • Industry
    Oil and gas