TEXT-Fitch affirms Naftogaz at 'CCC'; guaranteed notes at 'B'
(The following statement was released by the rating agency)
Jan 11 - Fitch Ratings has affirmed NJSC Naftogaz of Ukraine's (Naftogaz) Long-term foreign currency Issuer Default Rating (IDR) at 'CCC' and USD1,595m state-guaranteed notes at 'B'. A full list of rating actions is at the end of this release.
Naftogaz's ratings continue to reflect Fitch's assessment that default is a real possibility due to the continued weakness of the company's business and financial profiles, and its ongoing dependency on the government of Ukraine ('B'/Stable), its sole shareholder, for timely financial support. The agency believes that the company's financial position may deteriorate further due to an expected decline in gas transit volumes. Fitch negatively views the overall uncertainty over Naftogaz's possible restructuring. As Ukraine's dominant oil and gas company, Naftogaz operates the national gas transportation system and is engaged in natural gas production, imports and distribution in the country.
- Deficit Remains
The disparity between the prices for gas imported from Russia's OAO Gazprom ('BBB'/Stable) and regulated domestic tariffs for heating companies is a key concern. Tariffs for residential customers and heating companies increased by 50% in August 2010, but plans for further increases have not yet materialised. In 2012, Naftogaz intended to purchase around 27bcm from Gazprom, and the price for imported gas increased to USD425 per thousand cubic metres (mcm) in 2012 from USD257 mcm in 2010, broadly in line with the oil price increase. Fitch expects that Gazprom will maintain high import prices for Ukraine over the medium term, despite Ukraine's attempts to renegotiate the price and to diversify its gas supplies.
- Lower Transit Volumes Expected
Ukraine's gas transit volumes started to fall in 2012 as Russia took steps to diversify its gas transportation routes and launched the Nord Stream pipeline in 2011-2012. In 2011, Gazprom paid Naftogaz around USD3bn for gas transit, which accounted for around 20% of Naftogaz's revenue in 2011. Fitch believes that gas transit revenues may decrease by half in the medium term if the trend persists, which will have a negative impact on Naftogaz's already weak cash flow generating ability.
- State Aid Remains Critical
Naftogaz's cash flow generating ability remains extremely poor. At the current import gas price and domestic tariffs, Naftogaz will continue to generate negative free cash flow (FCF). The company will also have limited access to debt markets, in Fitch's view. Therefore, Naftogaz will still need state subsidies or other forms of support to meet its obligations. In 2011 and 2012, total direct and indirect state subsidies to Naftogaz amounted to UAH24bn (USD3bn) and UAH20bn (USD2.5bn), respectively. At the same time, Fitch is concerned that Ukraine may find it challenging to continue supporting Naftogaz, given its fiscal deficit and external financing gap.
- Business Restructuring Remains Possible
Fitch believes Naftogaz's business restructuring remains possible, although no concrete decisions have been taken. The restructuring could take different forms, including the split of Naftogaz into separate companies to comply with EU energy regulations, as well as leasing the gas transit infrastructure out to Gazprom or a consortium of international participants. Privatisation of the gas infrastructure is currently prohibited by local law. Fitch will assess the impact of possible restructuring on Naftogaz's credit profile when there is more certainty on the subject.
- 'CCC' Standalone Rating
Fitch continues to rate Naftogaz 'CCC' on a standalone basis, and does not give any notches up for state support. This largely reflects Fitch's view that Ukraine may face potential financial difficulties when supporting Naftogaz. Additionally, there remains overall uncertainty concerning any possible restructuring.
- USD1.595bn Bonds Unaffected
Fitch rates Naftogaz's USD1,595m notes at 'B', in line with the Ukraine's sovereign rating, based on the unconditional and irrevocable guarantee from the state. The agency does not expect Naftogaz's potential business restructuring to have an impact on the guarantee.
RATING SENSITIVITY GUIDANCE
Positive: A restructuring scenario including a closer cooperation with Gazprom on gas transit through Ukraine and lower import prices may be positive for Naftogaz. However, the current uncertainty around potential restructuring is negative for Naftogaz's ratings.
Negative: Lower gas transit volumes and the government's inability to provide timely financial aid to Naftogaz to support its liquidity would be negative for the ratings.
LIQUIDITY AND DEBT STRUCTURE
- Weak Liquidity, Higher Leverage
Naftogaz's liquidity remains weak, with expected negative FCF in 2012. The company's gross indebtedness increased to UAH60bn at end-2012 from UAH54bn at end-2011, of which UAH6bn falls due in 2013. Naftogaz expects to receive sufficient aid from the government and raise new loans to repay upcoming maturities.
- Elevated Refinancing Risks
Fitch assess Naftogaz's refinancing risks as elevated, taking into account its low credit profile, possible decline of transit revenues (which are pledged as security under some loans) as well as a high portion of loans from Ukrainian banks in the company's credit portfolio.
FULL LIST OF RATING ACTIONS
Long-term foreign currency IDR: affirmed at 'CCC'
Long-term local currency IDR: affirmed at 'CCC'
USD1,595m government-guaranteed notes: affirmed at 'B'/Recovery Rating 'RR4'