Moody's downgrades Sovcomflot's issuer rating to B1; all ratings placed on downgrade review
MOSCOW. Dec 24 (Interfax) - Moody's Investors Service has downgraded to B1 from Ba3 and placed on review for further downgrade Sovcomflot JSC's senior unsecured issuer rating and the senior unsecured rating assigned to the $800 million Eurobond issued by SCF Capital Limited, which is a 100% indirect subsidiary of Sovcomflot (Sovcomflot guarantees the Eurobond), the agency said in a press release.
Concurrently, Moody's has placed on review for downgrade Sovcomflot's Ba2 corporate family rating (CFR) and the Ba2-PD probability of default rating (PDR).
"In recent weeks volatility in the rouble exchange rate surpassed the heightened levels already experienced in 2014. To counter this trend, the Central Bank of Russia (CBR) has been increasing its key interest rates, although its efforts have had limited impact in stabilising the currency. Since the beginning of 2014, the CBR has increased interest rates by 11.5 percentage points in total," Moody's said.
"These developments will likely lead to a severe deterioration in the operating environment for Russian corporates namely higher inflation, unemployment and debt-servicing costs as well as lower domestic demand, resulting in a deeper and more protracted decline in domestic economic activity than previously anticipated. Moody's now expects Russian GDP to contract by 5.5% in 2015 and 3% in 2016. Moody's believes that even for the corporates that do not have refinancing needs in foreign currency, the likely continued severe deterioration of the operating environment might lead to a substantial weakening in their credit profiles," the agency said.
"Though the operations of Sovcomflot benefit from a high degree of international diversification and very good visibility thanks to long term contracts, there is no evidence that Sovcomflot may remain insulated from the ongoing severe and rapid deterioration in the operating environment in Russia and the heightened risk of a more prolonged and more acute economic downturn than originally anticipated.
The downgrade of Sovcomflot's senior unsecured issuer rating, and the senior unsecured rating assigned to SCF Capital's Eurobond issuance, reflects the weakened positioning of Sovcomflot's senior unsecured issuer rating in the waterfall of creditors' claims following the increase in its secured debt. The company's unsecured debt (including the Eurobond) remains structurally and contractually subordinated to the secured debt located at the operating company level, which comprises a major portion of the Sovcomflot group's total debt.
Moody's review for downgrade will assess Sovcomflot's resilience to the increased risk arising from the prevailing negative operating conditions in Russia, including the potential adverse effect on its Russian customers.
In addition, Moody's will also consider the need for adjustments to its assumptions regarding the Russian government's willingness to provide support to Sovcomflot. This consideration reflects the risk that the government's supportive stance towards a particular corporate may be reduced in the event that the government faces calls for support from many entities and sectors. The review will also assess Sovcomflot's liquidity and access to foreign currency to service its foreign currency debt obligations, given recent and prospective pressure on Russia's foreign currency reserves. While Russia's foreign currency reserves remain substantial, if reserves continue to diminish rapidly over coming months, the Russian government may be forced to consider rationing the provision of foreign currency to the economy, including the financing of non-financial corporates, including Sovcomflot, in an adverse scenario.
Upward pressure on Sovcomflot's ratings is unlikely at present, given the current review for downgrade. Moody's could confirm the ratings if (1) the economic environment in Russia stabilises or Sovcomflot shows sufficient resilience; and (2) the company builds up a solid liquidity cushion over the next few months, while maintaining its adjusted debt/EBITDA below 6.5x and adjusted funds from operations (FFO) interest coverage above 3.0x.
Moody's could downgrade Sovcomflot's ratings in the event that (1) the company does not execute appropriate refinancing over the next few months; (2) Moody's expects that the company's adjusted debt/EBITDA will rise above 6.5x and adjusted FFO interest coverage will decline below 3.0x on a sustained basis; or (3) Moody's revises downwards its assessment of the probability of the government providing extraordinary support to the company in the event of financial distress."
