Standard & Poor's Ratings Services said today that it raised its long-term corporate credit rating on Russian oil company TNK-BP International Ltd. (TNK-BP) to 'BBB' from 'BBB-'. At the same time, we raised our short-term corporate credit rating on TNK-BP to 'A-2' from 'A-3'. In addition, we removed the ratings from CreditWatch, where we had placed them with positive implications on Oct. 24, 2012. The outlook is stable.
The upgrade follows the acquisition of TNK-BP by Russian state-owned oil company OJSC Rosneft (BBB/Stable/--). We now align our ratings on TNK-BP with those on Rosneft to reflect that TNK-BP is a 100%-owned core subsidiary of Rosneft. The upgrade on TNK-BP therefore reflects that on Rosneft (see "Russian Oil Company Rosneft OJSC Upgraded To 'BBB' Following TNK-BP Acquisition; Outlook Stable," published April 16, 2013, on RatingsDirect).
Rosneft bought 50% of TNK-BP from Russian consortium AAR for $27.73 billion and 50% from BP PLC for $16.65 billion in cash and 12.84% of Rosneft's treasury shares. Following the transaction, we believe that the "very high" likelihood of the Russian government (Russian Federation, foreign currency BBB/Stable/A-2, local currency BBB+/Stable/A-2) providing timely and sufficient extraordinary support to Rosneft outweighs the deterioration we see in its stand-alone credit profile (SACP) of 'bb' due to significantly higher debt and large refinancing needs.
We align our corporate credit ratings and SACP on TNK-BP with those on Rosneft to reflect our assessment of TNK-BP as a core subsidiary of Rosneft. We base this assessment on the close alignment of respective interests between the two companies, as well as the following considerations:
• We believe TNK-BP to be a principal subsidiary of Rosneft under Rosneft's bond documentation. Therefore a default at TNK-BP would likely trigger an event of default at Rosneft. TNK-BP contributed about 42% of total production, 37% of proven reserves, and most of the free operating cash flow of the pro forma consolidated group in 2012.
• Both companies rely on the same sources of capital. TNK-BP operates in the same country and industry as its 100% parent and its operations are likely to become increasingly integrated.
• Rosneft has control of TNK-BP's assets and appoints its management. Rosneft has made an investment in TNK-BP that is many times the size of the external debt at TNK-BP (on Dec. 31, 2012, TNK-BP reported gross debt of $7.9 billion).
The stable outlook on TNK-BP reflects that on Rosneft. The ratings on TNK-BP will move in line with those on Rosneft. The stable outlook on Rosneft reflects our view that Rosneft will be able to successfully refinance its large debt maturities.
Ratings upside is limited because we do not see Rosneft's creditworthiness as higher than that of the Russian Federation.
Ratings downside could arise if Rosneft faced difficulties in refinancing, leading to "less than adequate" liquidity. We could also consider a downgrade if we saw any signs of diminishing government support.