27 Aug 2009 18:13

S&P affirms Rosneft at 'BBB-' with stable outlook on improved financial flexibility

MOSCOW. Aug 27 (Interfax) - Standard & Poor's Ratings Services has affirmed its 'BBB-' long term corporate credit rating on Russia's largest oil company OJSC Oil Company Rosneft , the ratings agency said in a statement.

The outlook is stable.

"The affirmation reflects our view that Rosneft's stand-alone credit profile is now consistent with 'BBB-' credit quality, based on its "satisfactory" business risk profile and "intermediate" financial risk profile," said Standard & Poor's credit analyst Andrey Nikolaev.

As per S&P's methodology for rating government-related entities (GREs), the agency no longer adds one notch to Rosneft's stand-alone credit profile, because it is now closer to the sovereign local currency rating than it was previously.

S&P continues to assess the probability of timely and sufficient extraordinary government support to Rosneft as "moderately high" based on the agency's perception of the "important" role of the company and "strong" link with the government of the Russian Federation (foreign currency BBB/Negative/A-3; local currency BBB+/Negative/A-2; Russia national scale 'ruAAA').

In S&P's opinion, Rosneft's financial flexibility and liquidity was significantly enhanced by the $15 billion 20-year loan signed with the Chinese Development Bank (foreign currency A+/Stable/A-1+; local currency A+/Stable/--). S&P understands the loan will be used to refinance most of Rosneft's 2009-2010 maturities. S&P has raised Rosneft's stand-alone credit profile to 'BBB-' from 'BB+ to reflect the fact that although Rosneft still has relatively high leverage, with adjusted debt to EBITDA likely to be about 1.7x in 2009 under our $55 per barrel (bbl) Brent price assumption, the company's annual maturities starting from 2011 should be comparable with its free operating cash flow (FOCF), because of the long-term maturity profile of its debt.

The stable outlook reflects the agency's expectation that Rosneft will continue to generate neutral to positive FOCF in 2009-2010 by adjusting capital expenditures in line with fluctuating oil prices, but without compromising its major growth projects such as Vankor, a major new project in Eastern Siberia.

"The rating could come under pressure if the company undertook large debt-financed acquisitions or in the event of oil prices remaining significantly below our current assumptions for a prolonged period," Nikolaev said.

Significant deterioration in Russia's sovereign local currency rating is a key factor that could pressure the rating.

S&P could potentially raise the rating in the medium term if the company makes significant progress in reducing its high debt burden; or if the sovereign local currency credit rating is raised.