Fitch Ratings has maintained OJSC OC Rosneft's (Rosneft) Long-term foreign and local currency Issuer Default Ratings (IDR) of 'BBB' on Rating Watch Negative (RWN). Simultaneously, Fitch has upgraded TNK-BP International Ltd.'s (TNK-BP) Long-term foreign and local currency IDRs to 'BBB' from 'BBB-' and maintained them on RWN. A full list of rating actions is at the end of this press release.
In October 2012, Fitch placed Rosneft's ratings on RWN following the company's announced acquisition of a 100% stake in TNK-BP, Russia's third-largest oil company. In March 2013, Rosneft closed the deal for the total consideration of USD44bn in cash and 12.84% in treasury shares, for which it raised nearly USD37bn in new borrowings.
Fitch will resolve the RWN once it obtains comfort that Rosneft's funds from operations (FFO) net leverage will not exceed 2.5x on a sustained basis in 2013-2015. For that, the agency would need to ascertain that Rosneft's consolidated capex will not rise significantly above the pre-acquisition levels of each Rosneft and TNK-BP.
KEY RATING DRIVERS
Acquisition Drives Leverage Up:
To finance the acquisition of TNK-BP, Rosneft raised nearly USD37bn in new borrowings including two syndicated loans and loan participation notes (LPNs). Fitch forecasts that Rosneft's post-acquisition FFO net adjusted leverage will increase to about 2.5x by 2015, up from 1.5x in 2012, based on the agency's Brent price assumption of USD100/bbl in 2013, USD92/bbl in 2014 and USD85/bbl in 2015.
Under its conservative rating case, Fitch treats prepayments of up to USD10bn that Rosneft plans to receive from oil traders Glencore and Vitol in exchange for future oil supplies as part of its total indebtedness, even though the deal does not contain any covenants or guarantees on the part of Rosneft. Excluding these prepayments, the agency forecasts Rosneft's FFO net leverage to increase to about 2.2x in 2015.
Capex Under Review:
Rosneft's capex as key for resolving the RWN. The company is currently reviewing its consolidated budget, including capex. The agency currently assumes that Rosneft's capex will not exceed 25% of its net revenues in 2013-2015. However, if the capex is significantly higher leading to net FFO leverage above 2.5x on a sustained basis, Fitch may take a negative rating action on Rosneft.
Improved Post-Acquisition Profile:
Rosneft's operational profile has significantly improved following the acquisition of TNK-BP. Its post-acquisition hydrocarbons output of 4.2m barrels of oil equivalent per day (excluding equity stakes) places it ahead of such majors as Royal Dutch Shell plc ('AA'/Stable), BP plc ('A'/Positive) or ConocoPhillips ('A'/Stable). Rosneft now controls about 40% of Russia's crude production and 30% of its refining capacity. On the other hand, combined Rosneft lags behind global peers in EBITDA generation due to high taxation in Russia.
State Support Incorporated:
Fitch continues to incorporate support from the Russian Federation ('BBB'/Stable), Rosneft's majority shareholder, into Rosneft's ratings. On the other hand, the agency notes that Rosneft's operational scale is now so large that the state might find it challenging to support the company under a stress-case scenario, e.g. if oil prices plummet significantly for a prolonged period of time, as Russia's economy itself heavily depends on oil revenues.
TNK-BP Aligned With Parent:
The upgrade of TNK-BP's IDRs to 'BBB' from 'BBB-' indicates that Fitch has aligned its ratings with those of Rosneft, its new parent. This reflects the fact that Rosneft's LPNs contain a cross-default provision that covers, among other things, indebtedness of principal subsidiaries. We believe TNK-BP is a principal subsidiary of Rosneft under the documentation, and therefore cross-default provisions would fully cover TNK-BP's existing indebtedness including the USD-denominated notes issued by TNK-BP Finance S.A.
To resolve the RWN, Fitch will need to obtain comfort that Rosneft's FFO net leverage will not exceed 2.5x on a sustained basis. Fitch will aim to resolve RWN by mid-2013.
LIQUIDITY AND DEBT STRUCTURE
Syndicated loans to be refinanced: In Q412-Q113 Rosneft raised nearly USD37bn in new borrowings including two syndicated loans and LPNs to finance the acquisition of TNK-BP. A significant portion of the USD31bn syndicated loans are due in 2014-2015. Fitch expects that Rosneft will refinance a large portion of syndicated loans with capital market debt, long-term loans from Russian state-owned banks and/or prepayments for crude oil supplies.
LIST OF RATING ACTIONS
OJSC OC Rosneft
Long-term foreign currency IDR: 'BBB'; maintained on RWN
Long-term local currency IDR: 'BBB'; maintained on RWN
Senior unsecured rating: 'BBB'; maintained on RWN
Rosneft International Finance Limited
Senior unsecured rating: 'BBB'; maintained on RWN
TNK-BP International Inc.
Long-term foreign currency IDR: upgraded to 'BBB'; maintained on RWN
Long-term local currency IDR: upgraded to 'BBB'; maintained on RWN
Short-term foreign currency IDR: 'F3'; maintained on RWN
TNK-BP Finance S.A.
Senior unsecured rating: upgraded to 'BBB'; maintained on RWN
Short-term rating: 'F3'; maintained on RWN