Sept 26 - Fitch Ratings says that OJSC OC Rosneft’s (‘BBB’/Stable) credit metrics provide sufficient headroom to raise up to USD15bn of additional debt for the potential acquisition of a 50% stake in TNK-BP International Ltd (‘BBB-'/Stable) while maintaining its current rating. More material leveraging up of the balance sheet without demonstrated flexibility of Rosneft’s dividend policy and capex programme would be likely to result in a downgrade, most probably limited to one notch, hence enabling the company to maintain an investment-grade rating.
Fitch estimates that Rosneft’s current capital structure could absorb a maximum of USD15bn additional debt at the current rating level. This would lead to stretched credit metrics with FFO adjusted gross leverage ratios, based on Fitch’s conservative projections, hovering around 2x in 2013-14 (1.5x in 2011 and forecast at 1.7x in 2012) approaching the agency’s negative rating action guideline of above 2x on a sustained basis. While this would put pressure on the current ‘BBB’ rating, it is unlikely to result in a downgrade if the company could demonstrate a commitment to de-leveraging. This estimate is based on Fitch’s base case oil price deck of USD105/bbl for 2012 and USD90/bbl for 2013 and the assumption that TNK-BP will distribute at least 50% of its net profit as dividends.
Rosneft’s financial profile benefits from a cash position of USD7.3bn and treasury shares valued at USD8.9bn at end-H112. Although the financing structure of the potential acquisition is uncertain, this additional liquidity should provide some extra cushion against the potential sizable debt burden if the acquisition is successfully executed.
A more aggressive capital structure, for example resulting from a fully debt-funded acquisition or additional debt well in excess of the USD15bn threshold, coupled with limited flexibility of Rosneft’s dividend policy and capex plans, is likely to result in leverage levels well above 2x and thus a downgrade. Fitch does not expect the downgrade in this case to exceed one notch, which should enable the company to maintain an investment-grade rating. However, if the post-acquisition leverage ratios exceed 3x, stronger negative rating momentum may mount. In this case, Fitch will re-assess the degree of state support and whether it is sufficient to underpin investment-grade ratings.
If the acquisition takes place, Fitch will treat the acquired stake based on the equity method and exclude it from Rosneft’s reserves and production calculation. In addition, Fitch does not expect any changes to TNK-BP’s ratings following the potential acquisition of a 50% interest by Rosneft.
Rosneft has so far only expressed its interest in considering the acquisition of a 50% stake in TNK-BP put up for sale by BP plc (‘A’/Positive). Fitch will need to understand the acquisition price, the funding details (eg proportion of debt and equity), future dividend policy at Rosneft and TNK-BP and any amendments to Rosneft’s capex plans as a result of the potential acquisition. The agency will also need to assess the efficiency and coherency of Rosneft’s cooperation with the remaining shareholder of TNK-BP (Alfa-Access-Renova) in determining TNK-BP’s strategy and financial policy.