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May 16 (The following statement was released by the rating agency)
Fitch Ratings has affirmed Romania-based KMG International NV's (KMGI: formally The Rompetrol Group NV) Long-term Issuer Default Rating (IDR) at 'B+'. The Outlook is Stable.
The rating reflects KMGI's continued heavy reliance on its parent company JSC National Company KazMunaiGas (NC KMG; BBB/Stable) for financial support. Fitch views KMGI's stand-alone rating as commensurate with a 'CCC' rating, given the company's weak financial profile (end-2013: funds from operations (FFO) net adjusted leverage of 30x). Fitch treats the 51-year hybrid loan from KazMunayGas PKOP Investment B.V. (outstanding balance at end-2013 of USD0.9bn) as debt because interest payments are not deferrable if the company returns to profitability and starts paying dividends.
KMGI plans to finalise the repurchase of around 27% of Rompetrol Rafinare S.A.'s (RRC) shares from the government in 2014 for USD200m. Fitch believes that NC KMG is financing the transaction through a shareholder loan to KMGI, further demonstrating parental assistance.
KEY RATING DRIVERS
KMG Rebranding Complete
NC KMG's rebranding was complete in March 2014 when the group renamed what was formally known as The Rompetrol Group to KMG International NV, to more closely align the subsidiary with its parent company. However Rompetrol, a brand born in Romania, and used in domestic and foreign gas stations, will be kept for the near future, according to the company. Fitch views the rebranding as significant in further integrating the Romanian business into the NC KMG group, but does not attach any additional support to the standalone rating beyond that already incorporated.
Expansion of Retail Development Strategy
KMGI is keen to improve its integrated distribution (retail and wholesale) network domestically, having completed the upgrade of its Petromidia refinery in 2012. KMGI will focus on the Romanian market, where it plans to open 96 new filling stations by 2017. The company believes it is in a position to increase market share in Romania from their approximate 25% share (16% retail). In Fitch's opinion KMGI would benefit from a greater share of the domestic market. In Romania, KMGI operates over 450 gas stations and 250 liquefied petroleum-filing stations.
Share Buyback Support
KMGI plans to repurchase around 27% of RRC shares from the government in line with the Memorandum of Understanding entered into with the Romanian State. KMGI aims to complete the purchase in 2014. Fitch expects that NC KMG will finance the transaction through an intercompany loan. Fitch had said previously that in light of the historical support provided by NC KMG to KMGI, it is likely that the company will receive financial support from its parent to finance such a transaction, which is not expected to impact KMGI's rating.
Acquisition Growth Strategy Delayed
KMGI will reassess its investment plans in Ukraine and Turkey following recent political and social developments in the two countries. KMGI was earlier considering expanding into these markets. Fitch believes that KMGI is still keen to be involved in these markets, and could eventually look to make an acquisition as a quick way to gain a foothold if the political climate improves.
Credit profile implications for KMGI will depend on the structure of financing for potential acquisitions, which is yet to be determined.
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
-Improvement in KMGI's standalone financial profile away from the 'CCC' rating category
-Increased cash flow generation from an improving business profile
-Higher market share in Romania or neighbouring markets such as Turkey or Ukraine
-A longer debt maturity profile
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Reduced support from NC KMG
- Liquidity crisis related to cash flow difficulties
- Large debt-financed acquisitions at the KMGI level
- Large debt-financed capital expenditure at the KMGI level
LIQUIDITY AND DEBT STRUCTURE
At end-2013 KMGI's short-term debt amounted to USD682m, against a cash balance of USD226m. Fitch assumes KMGI will be able to extend a significant portion of short-term credit lines with domestic relationship banks in 2014.