(The following statement was released by the rating agency)
Oct 09 - Fitch Ratings has assigned Russia-based OAONovatek's (Novatek) series 2, 3 and 4 domestic stock exchange bonds an expectedlocal currency senior unsecured rating of 'BBB-(EXP)' and an expected Nationalsenior unsecured rating of 'AA+(rus)(EXP)'.
The series 2, 3 and 4 domestic exchange bonds represent a senior unsecuredobligation of Novatek . Fitch will assign a final rating to these bonds once theamount, maturity and coupon are determined pending the receipt of finaldocumentation.
In September 2012, Fitch affirmed OAO Novatek's Long-term foreign and localcurrency Issuer Default Ratings (IDR) and senior unsecured ratings at 'BBB-' andits National Long-term rating and National senior unsecured ratings at'AA+(rus)'.
The development of the Yamal LNG project is a critical rating factor affectingNovatek's future business profile. Fitch anticipates this project will diversifyproduction geographically and provide potential new marketing channels thatenhance Novatek's business profile. It would also give Novatek a toehold intothe global LNG market and position the company at the centre of one of Russia'skey energy development projects. Yamal LNG has the potential to ultimatelytransform the company's core operations.
Financing of the project is also a critical rating factor. Novatek has not madea final decision about how the Yamal LNG project will be financed. The companycould make a final investment decision in 2012. Negative rating action couldoccur if Novatek is responsible for funding large parts of the project on itsown, finances the majority of the project through debt on its own balance sheet,or guarantees a material amount of the debt attracted to finance the project.
Delays to the project would not necessarily have immediate negative consequencesfor Novatek's business profile and credit ratings. Project delays would insteadbe reflected in a lack of positive business development constraining anyupgrade.
Novatek also benefits from the government's plan to liberalise the price ofnatural gas sold on the Russian domestic market by 2015-2018. Fitch expectsdomestic gas prices in Russia to increase by around 15% per year to 2018. Thecompany is also increasing its access to export markets in stable gas condensateand LPG. Fitch regards a greater proportion of revenue coming from exports aspositive for the stability of cash flow generation and the stability of thefinancial profile.
The Russian Finance Ministry is still considering the possibility of increasingthe Mineral Extraction Tax (MET) rate for gas producers in 2013-2015. Accordingto the plan announced in September 2012, the MET paid by Novatek may double by2015. Fitch believes the rising tax burden will have a limited negative effecton the company's profits, and expects this to be offset by the rising internalgas prices and hence will not trigger a negative rating action.
Novatek continues to enjoy a healthy financial profile, with a relatively lowdebt level, stable operating cash flows and manageable capital expenditures. In2011 and in the 12 months to 30 June 2012, its funds from operations (FFO)remained solid at RUB73bn (USD2.4bn) and RUB74bn, respectively. In 2009-2011 thecompany's pre-acquisition free cash flow (excluding acquisition expendituresand loans granted to joint ventures) on average amounted to RUB13bn p.a., or 11%of consolidated revenue.
Fitch expects FFO-adjusted gross and net leverage not to exceed 1.4x and FFOinterest coverage to be 12x or above in 2012-2014. Fitch also believes thatNovatek has some additional leverage headroom at the current rating level. Anegative rating action would probably result from the company consistentlyexceeding FFO-adjusted leverage of 2x and FFO interest coverage remainingconsistently below 10x.
WHAT COULD TRIGGER A RATING ACTION?
Positive: Future developments that may, individually or collectively, lead topositive rating action include:
- Completion of Yamal LNG enhancing the company's business profile with greateraccess to export markets and more diversified operations
- Larger domestic market share to a level that makes Novatek a more seriousGazprom competitor
- Leverage consistently less than 0.5x; interest coverage consistently greaterthan 20x; and consistently positive free cash flow
Negative: Future developments that may, individually or collectively, lead tonegative rating action include:
- Large self-financed cash outlays for Yamal LNG development, majority debtfunding of Yamal LNG through Novatek's balance sheet, or Novatek guaranteeing amaterial portion of the debt attracted to finance the project
- Debt-financed acquisition-led growth strategy that results in a permanentdeparture from the presently conservative financial policy
- Leverage consistently greater than 2x; interest coverage consistently lessthan 10x; and consistently negative free cash flow
- Rising domestic competition that results in loss of market share orcompetitive position