Moody's downgrades Sovcomflot's CFR to Ba1
Moody's Investors Service has today downgraded to Ba1 from Baa3 the corporate family rating (CFR) and probability of default rating (PDR) of Sovcomflot JSC (SCF). Concurrently, Moody's has downgraded SCF's issuer rating to Ba2 from Ba1 and the senior unsecured rating assigned to the USD800 million Eurobond issued by SCF Capital Limited, which is a 100% indirect subsidiary of SCF (SCF guarantees the Eurobond), to Ba2 with a loss given default assessment of 6 (LGD6/90%) from Ba1. The outlook on all ratings is stable.
As SCF is a 100% state-owned company, Moody's applies its Government-Related Issuer (GRI) rating methodology in determining the company's CFR. According to this methodology, the rating is driven by a combination of (i) SCF's baseline credit assessment (BCA) of 13 (mapping to Ba3); (ii) the Baa1 local currency rating of the Russian government;
(iii) the low dependence between SCF and the government; and (iv) the strong probability of government support.
RATINGS RATIONALE
The downgrade was triggered by Moody's decision to change SFC's BCA to 13 (mapping to Ba3) from 12 (mapping to Ba2). This decision followed the company's weaker than anticipated by Moody's performance for the third quarter 2011 and the further subsequent deterioration in the broader sector's trading conditions since then. As a result, SFC's 2011-12 credit metrics will most likely be significantly weaker than previously estimated by Moody's and no longer commensurate with a BCA equivalent of Ba2. The deterioration in SCF's performance reflects the poor performance of the industry during 2011. This was caused by the oversupply of vessels on the water, which slashed freight rates to a very low level. The rating agency notes that the BCA incorporates the assumption that industry conditions will remain challenging for the next 12-18 months.
At the same time, Moody's continues to acknowledge SCF's solid business profile thanks to its (i) strong customer base; (ii) diversification in the gas transportation and offshore businesses, alongside its conventional tanker business; (iii) specialised ice-class fleet (including Arctic shuttle tankers), which provides the company with a competitive advantage for servicing projects and operations in harsh weather conditions; and (iv) conservative fleet management, with only limited exposure to the spot tanker market. In addition, Moody's notes that SCF's liquidity remains solid and comfortably covers its debt maturities over the next 12-18 months.
As stated above, there is a one-notch difference between the CFR and both SCF's issuer rating and the senior unsecured rating assigned to SCF Capital's Eurobond issuance. This reflects the structural and contractual subordination of the bond to secured debt, which comprises a major portion of the SCF group's total debt.
In Moody's view, SCF's credit metrics are likely to remain weakly positioned at Ba3 over the next 12-18 months as a result of the anticipated challenging market environment. However, the stable outlook reflects the rating agency's expectation that, despite this, the company's solid liquidity will sustain its credit profile until the market starts to recover.
WHAT COULD CHANGE THE RATING UP/DOWN
Moody's could upgrade SCF's rating by one notch if the rating agency were to change the company's BCA to Ba2 from Ba3. Moody's considers it unlikely that any upward pressure could be exerted on the BCA over the next 12-18 months. However, upward pressure could occur in the longer term if SCF were to reduce its debt/EBITDA ratio to 5.0x and increase its (funds from operations (FFO) + interest expense)/interest expense ratio to 3.75x on a sustainable basis, while maintaining its solid liquidity profile.
Moody's could downgrade SCF's rating by one notch if the rating agency were to lower the company's BCA to B1 from Ba3. Moody's could lower the BCA by one notch if SCF's financial metrics were to continue deteriorating materially, such that its debt/EBITDA were to rise above 6.5x and its FFO interest coverage were to decline below 3.0x, respectively, as of year-end 2012 (compared with 6.0x and 3.6x, respectively, as of September 2011). Since SCF's good liquidity profile is an important supportive factor, a material weakening of this profile would exert downward pressure on the rating.
PRINCIPAL METHODOLOGY
The principal methodology used in rating Sovcomflot JSC was the Global Shipping Industry Methodology published in December 2009. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June
2009 and the Government-Related Issuers methodology published in July 2010. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
Sovcomflot is the leading Russian energy shipping group, servicing approximately 25% of all seaborne hydrocarbons exports from Russia. The company is 100% state-owned. At 30 September 2011, SCF's last-12-months revenues were USD1.39 billion. The company ranks among the world's top five energy shipping players by deadweight tonnage (DWT), with a fleet of
148 vessels in operation (as of June 2011), of which four are chartered in, for a total of 11.6 million DWT. In addition, 17 ordered buildings, totalling 1.8 million DWT, are to be delivered in 2012-14.
As SCF is a 100% state-owned company, Moody's applies its Government-Related Issuer (GRI) rating methodology in determining the company's CFR. According to this methodology, the rating is driven by a combination of (i) SCF's baseline credit assessment (BCA) of 13 (mapping to Ba3); (ii) the Baa1 local currency rating of the Russian government;
(iii) the low dependence between SCF and the government; and (iv) the strong probability of government support.
RATINGS RATIONALE
The downgrade was triggered by Moody's decision to change SFC's BCA to 13 (mapping to Ba3) from 12 (mapping to Ba2). This decision followed the company's weaker than anticipated by Moody's performance for the third quarter 2011 and the further subsequent deterioration in the broader sector's trading conditions since then. As a result, SFC's 2011-12 credit metrics will most likely be significantly weaker than previously estimated by Moody's and no longer commensurate with a BCA equivalent of Ba2. The deterioration in SCF's performance reflects the poor performance of the industry during 2011. This was caused by the oversupply of vessels on the water, which slashed freight rates to a very low level. The rating agency notes that the BCA incorporates the assumption that industry conditions will remain challenging for the next 12-18 months.
At the same time, Moody's continues to acknowledge SCF's solid business profile thanks to its (i) strong customer base; (ii) diversification in the gas transportation and offshore businesses, alongside its conventional tanker business; (iii) specialised ice-class fleet (including Arctic shuttle tankers), which provides the company with a competitive advantage for servicing projects and operations in harsh weather conditions; and (iv) conservative fleet management, with only limited exposure to the spot tanker market. In addition, Moody's notes that SCF's liquidity remains solid and comfortably covers its debt maturities over the next 12-18 months.
As stated above, there is a one-notch difference between the CFR and both SCF's issuer rating and the senior unsecured rating assigned to SCF Capital's Eurobond issuance. This reflects the structural and contractual subordination of the bond to secured debt, which comprises a major portion of the SCF group's total debt.
In Moody's view, SCF's credit metrics are likely to remain weakly positioned at Ba3 over the next 12-18 months as a result of the anticipated challenging market environment. However, the stable outlook reflects the rating agency's expectation that, despite this, the company's solid liquidity will sustain its credit profile until the market starts to recover.
WHAT COULD CHANGE THE RATING UP/DOWN
Moody's could upgrade SCF's rating by one notch if the rating agency were to change the company's BCA to Ba2 from Ba3. Moody's considers it unlikely that any upward pressure could be exerted on the BCA over the next 12-18 months. However, upward pressure could occur in the longer term if SCF were to reduce its debt/EBITDA ratio to 5.0x and increase its (funds from operations (FFO) + interest expense)/interest expense ratio to 3.75x on a sustainable basis, while maintaining its solid liquidity profile.
Moody's could downgrade SCF's rating by one notch if the rating agency were to lower the company's BCA to B1 from Ba3. Moody's could lower the BCA by one notch if SCF's financial metrics were to continue deteriorating materially, such that its debt/EBITDA were to rise above 6.5x and its FFO interest coverage were to decline below 3.0x, respectively, as of year-end 2012 (compared with 6.0x and 3.6x, respectively, as of September 2011). Since SCF's good liquidity profile is an important supportive factor, a material weakening of this profile would exert downward pressure on the rating.
PRINCIPAL METHODOLOGY
The principal methodology used in rating Sovcomflot JSC was the Global Shipping Industry Methodology published in December 2009. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June
2009 and the Government-Related Issuers methodology published in July 2010. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
Sovcomflot is the leading Russian energy shipping group, servicing approximately 25% of all seaborne hydrocarbons exports from Russia. The company is 100% state-owned. At 30 September 2011, SCF's last-12-months revenues were USD1.39 billion. The company ranks among the world's top five energy shipping players by deadweight tonnage (DWT), with a fleet of
148 vessels in operation (as of June 2011), of which four are chartered in, for a total of 11.6 million DWT. In addition, 17 ordered buildings, totalling 1.8 million DWT, are to be delivered in 2012-14.
