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April 1 (The following statement was released by the rating agency)
Fitch Ratings has assigned Polish oil refining and marketing company Polski Koncern Naftowy ORLEN S.A.'s (PKN; BBB-/ A-(pol)/Stable) domestic four-year PLN200m bonds a National senior unsecured rating of 'A-(pol)'. A full list of PKN's ratings is provided at the end of this commentary.
This is PKN's fifth issue under its PLN1bn bond programme. The bonds are rated at the same level as its National senior unsecured rating of 'A-(pol)' as they constitute senior unsecured obligations of PKN. There are no financial covenants included in the bond documentation.
PKN's ratings reflect the company's business diversification with operations in the refining, petrochemical and fuel retail sectors, its strong position in the Polish market and an improved financial profile with funds from operations (FFO) net adjusted leverage of 2.5x in 2013 (including adjustments for inventory-holding losses and sales of obligatory reserves of crude oil). The ratings are mainly constrained by the cyclicality of the refining and petrochemical operations.
KEY RATING DRIVERS
Improved Financial Profile
The ratings reflect PKN's improved financial profile following several measures taken by management to reduce leverage, including the disposal of Polkomtel S.A. in 2011 and a slowdown in capex in 2011-2013 after a capex-intensive period in 2007-2010. Fitch believes that PKN has much greater flexibility to reduce its capex in 2014-2017 than in 2007-2010, when it made some major committed investments. The agency views positively PKN's proven ability to manage working capital changes in line with shifts to its financial position. These factors help support PKN's creditworthiness amid still difficult conditions in the European oil refining sector.
Refining Margins under Pressure
The European refining sector remains under pressure mainly due to overcapacity, muted demand and competition from the US, Russian and Middle Eastern refineries. Fitch expects difficult market conditions to continue in 2014 with refining margins similar to levels in 2013. Fitch expects that the fuel retail and petrochemical segments will be the main contributors to PKN's EBITDA in 2014. These two business lines accounted for 88% of EBITDA under LIFO standards in 2013 (58% in 2012; excluding upstream and corporate functions).
Sound Credit Targets
The company's credit profile is supported by PKN's sound credit ratio targets, including a gearing ratio below 30% and covenant net debt-to-EBITDA below 1.5x. In line with its updated strategy, PKN reinstated dividend payments in 2013 following a period of no dividend payment in 2009-2012. The company is planning a gradual increase in dividends so that each payout will be up to 5% of average market capitalisation in the preceding year. However, dividend payouts will depend on the company's financial position and the economic environment, which Fitch views as positive for the ratings.
Compulsory Stock of Oil and Oil Products
In January 2014 the Polish government enacted a draft bill, which will serve to reduce PKN's obligatory crude oil and oil products stock between 2015 and 2017 from an equivalent of 76 days of consumption to 53 days of imports. This could be positive for PKN's financial profile by reducing the company's inventory by approximately PLN2.2bn. However, it is too early to determine the exact impact on leverage ratios as the government has yet to agree on the charges oil processing and trading companies will need to pay to maintain obligatory oil and oil products stock at the Material Reserve Agency and whether those charges would be reflected in fuel prices.
Positive: Rating upside potential is currently limited by the cyclicality of the refining and petrochemical operations. However, positive rating action may result from a material improvement in the company's business profile resulting in lower cyclicality of operating cash flows, with FFO adjusted net leverage not exceeding 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 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, for example, due to substantially weaker-than-expected conditions for refining and petrochemicals operations.
- Capex substantially above FFO, resulting in heavy negative free cash flow in the medium term
- Aggressive dividend policy
LIQUIDITY AND DEBT STRUCTURE
Ample Liquidity until 2017
At end-2013 short-term debt of PLN0.9bn was covered by cash of PLN2.9bn, 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. At end-2013 the company had sufficient headroom within its financial covenants.
Strong Access to Debt Markets
PKN has strong access to the bank loan and domestic bond markets. Group debt of PLN7.5bn at end-2013 mostly comprised bank loans (77% of total debt) and bonds (23%). The company plans to increase the share of bonds in the funding structure in the next few years through the issuance of domestic bonds and eurobonds.
FULL LIST OF RATINGS
Long-term foreign and local currency Issuer Default Ratings (IDR) 'BBB-'; Stable Outlook
Short-term foreign and local currency IDRs 'F3'
Foreign and local currency senior unsecured ratings 'BBB-'
National Long-term rating 'A-(pol)'; Stable Outlook
National senior unsecured rating 'A-(pol)'