RPT-Fitch upgrades Poland's PKN to 'BBB-', stable outlook
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Aug 30 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has upgraded Polski Koncern Naftowy ORLEN S.A.'s (PKN) Long-term foreign currency Issuer Default Rating (IDR) to 'BBB-' from 'BB+'. The Outlook is Stable. A full list of rating actions is at the end of this release.
The upgrade reflects PKN's improved financial profile, in particular a substantial reduction of debt and better financial flexibility, which support the company's creditworthiness in light of the still difficult conditions for the European oil refining sector. The upgrade also reflects PKN's strategic focus on the company's financial standing and maintaining credit ratios at moderate levels, which mitigates the high business risk stemming from the cyclicality of PKN's two main business units, refining and petrochemicals. PKN has an ambitious capex plan for 2013-2017, which may be scaled down if financial results are weaker than expected. Our projections show that PKN's credit ratios are mainly dependent on its capex.
KEY RATING DRIVERS
Better Financial Profile
The ratings reflect PKN's improved financial profile thanks to several measures taken by management to reduce leverage, including the disposal of Polkomtel S.A. in 2011 (after-tax proceeds of PLN3.2bn (USD1bn)), its modest capex in 2011-2013 following a capex-intensive period in 2007-2010. This supports PKN's creditworthiness in the still difficult conditions for the European oil refining sector due to overcapacity and weak demand.
Fitch views PKN's strategy update announced in November 2012 as supporting the company's credit profile. One of PKN's strategic targets is to maintain credit ratios at a safe level, including the gearing ratio below 30% and covenant net debt-to-EBITDA below 1.5x. While the capex plan for 2013-2017 of PLN22.5bn is large (about 50% higher than in 2008-2012), the company also expects an increase in EBITDA by about 60% in this period partly due to investments. Fitch views positively the fact that PLN6.9bn of the planned capex for 2013-2017 is discretionary (mostly in the upstream and energy segments) and may be deferred or cancelled if cash flows are weaker than expected.
In line with the updated strategy, PKN reinstated dividend payments in 2013 after not paying them in 2009-2012. The company plans a gradual increase in the dividend payout in the next few years in order to reach up to 5% dividend yield. However, dividends will depend on the company's financial standing and the macro environment.
Improved Financial Flexibility
Fitch believes that PKN has much greater flexibility to reduce its capex if cash flows are weaker than in 2007-2010, when it was conducting some major committed investments. The agency views positively PKN's proven ability to manage its working capital changes in line with changes in its financial position. This could provide additional flexibility for the company should industry conditions weaken, leading to a deterioration of reported credit ratios potentially close to the covenant level defined in the main bank loan agreements.
In H113 PKN reported positive changes in working capital of PLN1.7bn, which together with low capex of PLN1bn, resulted in a relatively low net debt level and leverage ratio despite weaker market conditions in refining.
Most of PKN's EBITDA is generated in two highly cyclical sectors: oil refining and petrochemicals (each generating about 40% of 2011-2012 EBITDA before inventory holding gains/losses and before impairments). The remaining 20% of EBITDA comes from the more stable fuel retailing business. Fitch views PKN as a refining company with high business diversification in light of its substantial petrochemical operations and a strong position in fuel retail sales.
Diversification may help mitigate cash flow cyclicality, as seen in 2011 and H113 results, where solid performance in the petrochemicals segment supported PKN's cash flow at a time of weaker refining profits.
Positive: Rating upside potential is currently limited. Positive rating action would likely require a material improvement in the company's business profile resulting in lower cyclicality of operating cash flows with funds flow from operations (FFO) adjusted net leverage of up to 2.0x. This credit ratio is calculated by Fitch excluding the effect of inventory holding gains/losses and reversing the sale of compulsory crude oil inventory to third parties.
Negative: Future developments that could lead to negative rating actions include:
- A deterioration in cash flows and credit metrics (an increase in FFO adjusted net leverage (excluding inventory holding gains/losses and compulsory crude stock sales) to above 2.5x on a sustained basis) due, for example, to substantially weaker than expected conditions for refining and petrochemicals operations
- Capex substantially above FFO resulting in highly negative free cash flow in the medium term
- Aggressive dividend policy
LIQUIDITY AND DEBT STRUCTURE
Ample Liquidity and Sufficient Funding Until 2016-2017
At end-June 2013 short-term debt of PLN2.8bn was covered by cash of PLN4.6bn, and unused committed medium and long-term bank facilities of about PLN10bn, which mostly expire between 2016 and 2018. PKN's debt maturity profile is not onerous, with no major repayments due until 2016. Given its large available committed long-term funding, the company has no need to raise new external funding until 2016. The company had sufficient headroom within its financial covenants at end-June 2013.
Good Access To Debt Markets
PKN has good access to the bank loan and domestic bond markets. The company recently extended the maturity of its EUR2.6bn syndicated bank loan facility, PKN's main funding source, to 2017 (EUR1.55bn) and 2018 (EUR0.6bn) from 2016. It also issued four-year domestic bonds of PLN0.4bn in May-June 2013. The bond issue was placed among retail investors with a coupon of WIBOR plus 150 bps, which is comparable with bond coupons paid by some Polish electric utilities rated in the 'BBB' category.
Bank Loans Dominate Debt Structure
PKN group's debt of PLN9.7bn at end-June 2013 mostly comprised bank loans (82% of total debt) and bonds (18%). The company plans to increase the share of bonds in the funding structure in the next few years through the issue of domestic bonds and eurobonds.
FULL LIST OF RATINGS
Long-term foreign currency IDR upgraded to 'BBB-' from 'BB+'; Stable Outlook
Long-term local currency IDR upgraded to 'BBB-' from 'BB+'; Stable Outlook
Short-term foreign currency IDR upgraded to 'F3' from 'B'
Short-term local currency IDR upgraded to 'F3' from 'B'
Foreign currency senior unsecured rating upgraded to 'BBB-' from 'BB+'
Local currency senior unsecured rating upgraded to 'BBB-' from 'BB+'
National Long-term rating upgraded to 'A-(pol)' from 'BBB+(pol)'; Stable Outlook
National senior unsecured rating upgraded to 'A-(pol)' from 'BBB+(pol)'