Moody's downgrades Sovcomflot's CFR to Ba2; stable outlook
January 25, 2013 Moody's Investors Service
London, 24 January 2013 -- Moody's Investors Service has today downgraded to Ba2 from Ba1 the corporate family rating (CFR) and to Ba2-PD from Ba1-PD the probability of default rating (PDR) of Sovcomflot JSC (SCF).
Concurrently, Moody's has also downgraded SCF's issuer rating to Ba3 from Ba2 and the senior unsecured rating assigned to the $800 million Eurobond issued by SCF Capital Limited, which is a 100% indirect subsidiary of SCF (SCF guarantees the Eurobond), to Ba3 with a loss given default assessment of 5 (LGD5/85%) from Ba2. The outlook on all ratings is stable.
As SCF is a 100% state-owned company, Moody's applies its Government-Related Issuer (GRI) rating methodology in determining the company's CFR. According to this methodology, the rating is driven by a combination of (1) SCF's baseline credit assessment (BCA), a measure of standalone financial strength, of b2; (2) the Baa1 local currency rating of the Russian government; (3) the low default dependence between SCF and the government; and (4) the strong probability of provision of state support to the company in the event of financial distress.
The downgrade was triggered by Moody's decision to lower SFC's BCA to b2 from ba3. This decision reflects the fact that the company's financial metrics remain weak and do not demonstrate an improvement trend, which would be required for a higher BCA. In particular, SCF's leverage, measured by debt/EBITDA, stood at 6.4x as of September 2012 and is likely to rise above 6.5x as of year-end 2012, compared with the threshold of 5.5x that Moody's has set for a BCA of ba3. Moody's does not expect SCF to reduce its leverage below 6.0x over the next 12-18 months, as a result of the continuing difficult global tanker market environment, as well as the company's ongoing debt-financed investment in the expansion of its fleet.
At the same time, Moody's continues to acknowledge SCF's solid business profile thanks to its (1) strong customer base; (2) diversification into the gas transportation and offshore businesses, which complements its conventional tanker business; (3) specialised ice-class fleet (including Arctic shuttle tankers), which provides the company with a competitive advantage for servicing projects and operations in harsh weather conditions; and (4) conservative fleet management, with only limited exposure to the spot tanker market. In addition, Moody's notes that SCF's liquidity remains adequate and covers its debt maturities over the next
The stable outlook on SCF's ratings reflects Moody's expectation that the company's leverage will be below 6.5x debt/EBITDA and (funds from operations (FFO) + interest expense)/interest expense ratio above 3.0x on a sustainable basis. A recovery of SCF's financial metrics will be subject to an improvement in trading conditions in the tanker market, as well as the company's successful completion of its long-discussed IPO, which should provide it with the funds to repay part of its debt.
As stated above, there is a one-notch difference between the CFR and both SCF's issuer rating and the senior unsecured rating assigned to SCF Capital's Eurobond issuance. This differential continues to reflect the structural and contractual subordination of the bond to secured debt and unsecured debt located at the level of operating companies, which comprises a major portion of the SCF group's total debt. Moody's notes that the differential could increase to two notches if the company's positioning in its current rating were to weaken.
WHAT COULD CHANGE THE RATING UP/DOWN
Moody's could upgrade SCF's rating by one notch if the company were to reduce its debt/EBITDA to 5.5x or below and increase its FFO interest coverage to 3.5x on a sustainable basis, while maintaining its adequate liquidity. That said, Moody's considers it unlikely that any upward pressure could be exerted on the rating over the next 12-18 months.
Moody's could downgrade SCF's rating if (1) it expected the company's debt/EBITDA to remain above 6.5x as of year-end 2014 and beyond; (2) the company's FFO interest coverage were to decline below 3.0x on a sustainable basis; or (3) its liquidity were to weaken materially.
Moody's would not expect a one-notch change in the sovereign rating to affect SCF's ratings provided that all the other GRI inputs remain unchanged.
The principal methodology used in this rating was the Global Shipping Industry published in December 2009. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009 and the Government-Related
Issuers: Methodology Update published in July 2010. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
SCF is the leading Russian energy shipping group, servicing approximately 25% of all seaborne hydrocarbons exports from Russia. The company is 100% state-owned. As of September 2012, SCF's last-12-months revenues were $1.5 billion. The company ranks among the world's top five energy shipping players by deadweight tonnage (DWT), with a fleet of 147 own vessels for a total of 11.7 million DWT as of year-end 2012. In addition,
12 ordered buildings, totalling 1.3 million DWT, are to be delivered in 2013-14.
Company — Sovcomflot
Full nameSovcomflot PJSC