RPT-Fitch Maintains Russia's Rosneft and TNK-BP on RWN

Wed Jul 17, 2013 7:52am EDT

July 17 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has maintained OJSC OC Rosneft's (Rosneft) and TNK-BP International Ltd's (TNK-BP) Long-term foreign and local currency Issuer Default Ratings (IDRs) of 'BBB' on Rating Watch Negative (RWN). A full list of rating actions is at the end of this press release.

In October 2012, we placed Rosneft's ratings on RWN following the company's announced acquisition of a 100% stake in TNK-BP. In March 2013, Rosneft closed the deal for the total consideration of USD44.4bn in cash and 12.84% in treasury shares, for which it raised nearly USD37bn in new borrowings.

The maintained RWN reflects that uncertainty remains around Rosneft's ongoing capex and M&A activities, as well as its funding strategy. Fitch will aim to resolve the RWN by mid-October 2013 as we expect Rosneft to provide us with information by that time. We would need to obtain comfort that Rosneft's post-consolidated capex will not rise significantly above the pre-acquisition levels of both Rosneft and TNK-BP and its funds from operations (FFO) net adjusted leverage will not exceed 2.5x on a sustained basis in 2013-2015.

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. We forecast 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 Fitch's Brent price assumption of USD100/bbl in 2013, USD92/bbl in 2014 and USD85/bbl in 2015.

No Clarity on Prepayments

In June 2013, China National Petroleum Corporation (CNPC; 'A+'/Stable) reported that it had signed a 25-year oil supply contract with Rosneft, under which the latter will deliver up to 0.93m barrels of oil per day to China. According to press reports, Rosneft will receive up to USD70bn in prepayments from CNPC, which fully covers its total indebtedness at end-Q113 of nearly RUB2.2trn or USD67bn at current exchange rates. We have been unable to obtain comfort on the terms and condition of the deal and on Rosneft's future funding plans.

Capex Under Review

Rosneft's post-consolidation capex remains a key factor for resolving the RWN. The company is currently reviewing its consolidated budget, including capex. We presently assume that Rosneft's capex will not exceed 25% of its net revenues in 2013-2015. However, if capex is significantly higher leading to FFO net leverage above 2.5x on a sustained basis, we may take 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, based on Rosneft and TNK-BP's 2012 production excluding equity stakes, places it ahead of such majors as Royal Dutch Shell plc (AA/Stable), BP plc (A/Stable) or ConocoPhillips (A/Stable). Rosneft now controls about 40% of Russia's crude production and 30% of its refining capacity. However, 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 its ratings. However, we note 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, eg, if oil prices plummet significantly for a prolonged period of time, as the Russian government heavily depends on tax revenues from oil and gas companies.

RATING SENSITIVITES

To resolve the RWN, Fitch will need to obtain comfort that Rosneft's FFO net adjusted leverage will not exceed 2.5x on a sustained basis.

LIQUIDITY AND DEBT STRUCTURE

Tightening Liquidity, Large Repayments

At 31 March 2013, Rosneft reported RUB318bn in cash and cash equivalents and RUB471bn in short-term borrowings and finance lease obligations. Its gross unadjusted debt at end-Q113 was nearly RUB2.2trn. In 2014-2015, Rosneft needs to repay or refinance USD32bn, including syndicated loans raised for TNK-BP's acquisition. Fitch expects that the company will use a combination of capital markets debt, long-term loans from Russian state-owned and foreign banks and/or prepayments for crude oil supplies for that purpose.

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: 'BBB'; maintained on RWN

Long-term local currency IDR: 'BBB'; maintained on RWN

Short-term foreign currency IDR: 'F3'; maintained on RWN

TNK-BP Finance S.A.

Senior unsecured rating: 'BBB'; maintained on RWN

Short-term rating: 'F3'; maintained on RWN

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