Moody's assigns (P)B2 rating to Zhaikmunai's proposed notes; stable outlook
October 25, 2012
Moody's Investors Service has today assigned a provisional (P)B2 rating to the proposed approximately $500 million of loan participation notes (LPN) to be issued by Zhaikmunai International B.V. ("issuer") and jointly and severally guaranteed on a senior basis by its indirect 100% parent, Zhaikmunai LP ("Zhaikmunai", B2 stable), and all of its subsidiaries (jointly "guarantors"). The outlook on the rating is stable.
The notes will be the issuer's and the guarantors' senior obligations and will rank equally with all of the issuer's and the guarantors' other senior indebtedness. The proceeds from the issuance will be used for the sole purpose of financing a loan to Zhaikmunai LLP, a Kazakhstan-incorporated, 100% indirectly owned operating subsidiary of Zhaikmunai.
Zhaikmunai will utilise the proceeds of the new notes primarily to repurchase a portion of its $450 million of 10.5% outstanding senior unsecured notes ("existing notes") due 2015, which will be tendered in a Tender offer. The remainder will be used (1) to finance Zhaikmunai's purchase of the subsoil use rights to three new oil and gas fields in Kazakhstan, adjacent to the company's main Chinarevskoye production field; (2) to fund an appraisal and development programme for the fields; and (3) for other corporate purposes including capital expenditure.
Moody's issues provisional ratings in advance of the final sale of securities, and these ratings represent only the rating agency's preliminary opinion. Upon a conclusive review of the transaction and associated documentation, Moody's will assign definitive ratings to the bonds. A final rating may differ from a provisional rating.
The assigned rating on the notes is in line with Zhaikmunai's issuer rating. Moody's notes that the untendered existing notes and new notes will comprise all of the company's debt. The noteholders will benefit from certain restrictive covenants, including a negative pledge and restrictions on mergers and disposals.
Zhaikmunai's B2 rating reflects the group's (1) relatively modest scale of operations by international standards (with current average daily production of approximately 40,000 barrels of oil equivalent per day (boepd)); (2) high field concentration; and (3) exposure to Kazakhstan's country and operational risks. More positively, the rating also acknowledges (1) the substantial improvement in Zhaikmunai's operating and financial metrics following an increase in the company's oil production and launch of its gas treatment facility (GTF); (2) the company's positive track record of implementing large investment projects, and the elimination of completion risk following the commissioning of the GTF; (3) Zhaikmunai's good field geology, which accounts for the company's strong re-investment metrics and low production costs; and (4) its conservative financial policies and liquidity management.
In addition, Moody's notes that Zhakmunai will be embarking on Phase II of the GTF construction project in Q1 2013 subject to Board of directors approval. When completed, the project, which has a total estimated cost of approximately $350 million and a construction period of two years, will help to double the company's output. The company confirms that its reserves base, as well as its production and transportation facilities, will be sufficient to fully meet the resulting increased processing capacity.
The stable outlook on Zhaikmunai's ratings reflects Moody's expectation that there will be no movement in the company's rating over the short term, taking into consideration the active investment stage of Phase II of the GTF project. We expect the company's financial metrics, including leverage, to remain consistent with our expectations for the current rating category following completion of the tender offer and the new issuance.
WHAT COULD CHANGE THE RATING UP/DOWN
The ratings would experience positive pressure if the company demonstrates an ability to (1) sustainably and efficiently operate its facilities at designed capacity; (2) maintain strong liquidity and financial metrics; (3) successfully develop reserves and maintain healthy reserve replacement ratios; (4) adhere to conservative financial policies.
Conversely, Moody's could consider downgrade of the ratings as a result of any developments that weaken Zhaikmunai's operational or financial profile, including (1) a decline in production; (2) the company failing to replenish its reserves on a continuous basis; (3) a deterioration in its liquidity and financial profile; and (4) the imposition by the Government of Kazakhstan of material regulatory and/or contractual changes adversely affecting the economics of Zhaikmunai's operations.
The principal methodology used in rating Zhaikmunai International B. V. was the Global Independent Exploration and Production Industry Methodology published in December 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
Zhaikmunai LP ("Zhaikmunai"), through its wholly owned subsidiary Zhaikmunai LLP, is an independent oil and gas enterprise currently engaged in the exploration, production and sale of crude oil and gas condensate in the north-western region of Kazakhstan. Zhaikmunai operates the Chinarevskoye field, located in the northern part of the oil-rich Pre-Caspian Basin. In the first six months of 2012 the company's revenue amounted to $323.4 million, and EBITDA to $173 million (adjusted)
Issue — Zhaikmunai, 9.5% 25jun2033, USD
Country of riskKazakhstan
Redemption (put/call option)
М/S&P/F— / — / —
Company — Zhaikmunai
Full nameZhaikmunai LLP
IndustryOil and gas