Moody's Investors Services
Global Credit Research
Credit Opinion
30 APR 2009
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Credit Opinion: Sovcomflot JSC


Sovcomflot JSC

Sovcomflot JSC

Moscow, Russia


Ratings

Category Moody's Rating
Outlook Stable
Issuer Rating Baa2
NSR LT Issuer Rating -Dom Curr Aaa.ru

Contacts

Analyst Phone
Marco Vetulli/Milan 39.02.9148.1100
Paolo Leschiutta/Milan
Myriam Durand/Paris 33.1.53.30.10.20

Key Indicators

Sovcomflot JSC
2008 2007 2006 2005
EBIT Margin 30.6% 39.1% 41.8% 63.7%
FFO Interest Coverage 6.5x 4.6x 6.2x 8.1x
RCF/Capex+Investments(net disposals) 70.7% 52.5% 39.1% 70.7%
RCF / Net Debt 29.8% 22.8% 21.0% 39.3%
Gross Capex / Depreciation 341.8% 618.1% 831.5% 443.6%
Debt / Book Capitalization 48.0% 46.5% 51.0% 42.4%

Note: For definitions of Moody's most common ratio terms please see the accompanying User's Guide.


Opinion

Corporate Profile

Sovcomflot ("SCF" or "the company") is a state-owned Russian shipping company that focuses on the energy transportation sector. In December 2007, Sovcomflot acquired Novoship (the second-largest Russian oil tanker operator, 50.34% owned by the government through the Federal Property Management Agency). The new group, with global revenues with more than US$1.6 billion and total assets over US$5.7 billion, ranks in the world's top five energy-shipping players, with a fleet of about 132 vessels for a total deadweight (DWT) of around 9.5 million. In addition, there are 31 new vessels on order, representing 2.9 million tonnes DWT.

Recent Developments

On April 29, Moody's downgraded to Baa2 from Baa1 the issuer rating of Sovcomflot ("SCF"). At the same time, Moody's Interfax Rating Agency, which is majority owned by Moody's, affirmed the company's Aaa.ru long-term National Scale Rating ("NSR").The outlook for the ratings is stable. The rating action reflects Moody's decision to lower the government support assumptions for the company in the framework of Moody's rating methodology for Government Related Issuers. Although the rating agency continues to believe that SCF enjoys a high degree of support from the Russian government, the one-notch downgrade reflects the view that, in the current market conditions, such support provides a lower level of enhancement to the company's own creditworthiness.

Rating Rationale

In accordance with Moody's Government-Related-Issuer ("GRI") Rating Methodology, the Baa2 foreign currency issuer rating of Sovcomflot reflects the combination of the following inputs:

- A BCA of 11, on a scale of 1 to 21, where 1 represents lowest credit risk and 11 equates to a Ba1 rating

- The Baa1 with stable outlook local currency rating of the Russian government

- Low dependence

- High support

Sovcomflot's BCA of 11 reflects its strong position as a shipping company that has strategic importance for the exporting of Russian oil and gas, benefiting from a strong customer base as well as a market with significant barriers to entry, where it is the dominant player (specialised ice-breaking fleet for servicing projects and operations in harsh weather conditions, e.g. Arctic shuttle tankers). It also reflects the company's conservative fleet management, improving financial fundamentals and good credit metrics. Sovcomflot's BCA is in line with the indication provided by Moody's Global Shipping Methodology. Moody's notes that, after the merger with Novoship, the position of the company has been strengthened, given the increase in the size of the group, while credit protection measures have remained stable.

The six key factors that currently influence Sovcomflot's BCA are, in order of importance:

Factor [1] Size & Diversification (relative weight 25%)

After the acquisition of Novoship, the overall assessment in this rating factor has improved as Novoship brought not only an increase in size but also a broader geographical diversification.With a fleet of 132 vessels of 9.5 million DWT, SCF is now in the top five global tanker companies, and leader in all the main markets in which it operates (MR product carrier vessels, Artic shuttle tankers, Ice class LNG carrier, Aframax tankers). The concentration on two segments (crude and products) nevertheless limits the upside potential on this factor.

Factor [6] Credit Metrics (relative weight 25%)

SFC's performance in FYE08 was in line with the indicated BCA assessment. Given its low exposure to spot markets, SFC's credit metrics tend to be more resilient to the shipping cycle than its main competitors. The global assessment on this factor was in the low end of the Baa region.

Factor [3] Operating Efficiency and Flexibility (relative weight 15%)

In this key driver for a company operating in a capital-intensive sector, SCF's scores above its rating category, based on its young fleet managed along conservative parameters focusing on strong operational performance - rather than on arbitraging on market volatility. Moody's expects that after the merger, overall assessment in this rating factor should remain positioned in the low end of the Aaa-Aa category.

Factor [5] Financial Policy & Capital Structure (relative weight 15%)

A conservative financial policy and strong cash generation capabilities (SCF's cash generation benefits from low working capital swings, tax-free revenues and a moderate dividend) has supported a well balanced capital structure - as illustrated by a Debt/ Book capitalisation ratio of around 50% - notwithstanding the ambitious capital investment plan undertaken by the company. At FYE08, total gross debt (on a non-adjusted basis) was US$2.4 billion with a balanced maturity profile. As regards liquidity, in addition to its robust operative cash flow of around US$740 million, SCF relies on two main sources: (i) cash and marketable securities (as of FYE about US$300 million); and (ii) availability of committed bank facilities (as of FYE08 US$864 million). The relatively low percentage of encumbered vessels already provided as collateral will not affect future access to the capital markets in the coming years. Ownership of the group has so far limited any pressure to make dividend payments.

Factor [2] Revenue Characteristics (relative weight 10%)

After the merger with Novoship, SCF has maintained its conservative approach to fleet management (as of end of Dec. 2008, Sovcomflot maintained a 67%/33% fixed/spot ratio). A strong emphasis on long-term relationships results in low volatility of revenues. Overall assessment in this rating factor is Baa.

Factor [4] Cash Flow Variability (relative weight 10%)

The ambitious investment policy implemented by the company is reflected in a negative Free Cash Flow on historical basis. Nevertheless, a young fleet and a balanced investment strategy maintain this rating factor at a comfortable level. The overall assessment in this rating factor should remain well positioned in the Ba category.

Low dependence takes into consideration that Sovcomflot's revenues are largely achieved outside Russia, mostly with large international oil companies. Therefore, Moody's believes that the default dependence between the Russian government and Sovcomflot is low.

High support reflects i) Sovcomflot's strategic importance to the Russian oil and gas export industry, reflected in Sovcomflot being on the list of enterprises that are strategic to the Russian Federation; ii) its by-laws which focus on the strategic segments of Russian energy exportation; iii) government control, with government representatives dominating the board of directors; and iv) 100% state ownership and the absence of any regulatory barriers to state support.

Liquidity

Moody's regards SCF's liquidity situation for the next 12 months as sound, based on strong liquid financial assets of nearly US$300 million and good group cash flow generation that we expect to be in the region of US$665 million for 2009. In addition, as of FYE08, it has access to around US$864 million of un-drawn committed bank lines. In 2009, SCF faces some debt repayments of US$470 million and vessel purchase commitments in the region of US$680 million.

Rating Outlook

The stable outlook reflects both the satisfactory operating performance and good financial strength of the Company.

What Could Change the Rating - Up

A notch upgrade of the rating of the Russian Federation will not trigger an upgrade of SCF rating, with the BCA at the current level. SCF's rating could be upgraded by one notch if the BCA moves to 10. Upward pressure on the BCA would occur in the event that the company showed progress towards a Retained Cash Flow/Net Debt ratio in low thirties, an EBIT/Interest coverage ratio over 5x and/or a Debt/EBITDA ratio (all ratios on adjusted basis) under 3.0x on sustainable basis.

What Could Change the Rating - Down

The outlook could be revised or the rating could be adjusted downward in the event of weaker-than-expected market conditions and/or operational problems. SCF's rating could be downgraded by one notch if the BCA moves to 12. Downward pressure on the BCA would occur if Retained Cash Flow/Net Debt ratio fell below 20%, the EBIT/Interest coverage ratio fell below 3x and/or the Debt/Ebitda ratio (all ratios on adjusted basis) increased to over 4.0x. A liquidity problem would immediately exert downward pressure on the rating. A notch downgrade of the rating of the Russian Federation would not trigger a downgrade of SCF's rating with the BCA at the current level.


Rating Factors

Sovcomflot JSC
                                                                 
Shipping Industry Aaa - Aa A Baa Ba B Caa
Factor 1: Size & Diversification (25%)                                                                  
a) Size (by Revenue)                                  US$1.6B                      
b) Size of Fleet                       130                                 
c) Segment Diversification                                             x           
d) Geographic Diversification                                  x                      
e) Customer Structure                       x                                 
Factor 2: Revenue Characteristics (10%)                                                                  
a) Revenue Volatility (Avg.)                                                        66.3%
b) Contract Structure                       x                                 
Factor 3: Operating Efficiency & Flexibility (15%)                                                                  
a) Fleet Age (Avg.)            x                                            
b) Profitability 37.1%                                                       
Factor 4: Cash Flow Variability 10%)                                                                  
a) Ability to Generate Free Cash Flow thru the Cycle
   (Avg.)
                                            x           
b) Change in Fleet Age (Avg.)                       x                                 
c) Capex / Depreciation (Avg.) 6.0x                                                       
Factor 5: Financial Policy & Capital Structure (15%)                                                                  
a) Financial Strategy                                  x                      
b) Debt Maturities/ Debt Structure            x                                            
c) (Cash & Cash Equivalents / Total Assets)                                  5.1%                      
d) Availability of Credit Lines                                  x                      
e) Unencumbered Core Assets                       x                                 
Factor 6: Credit Metrics (25%)                                                                  
a) Adj. Retained Cash Flow / Net Adj. Debt                       29.8%                                 
b) Gross Adj. Debt / EBITDAR                       3.4x                                 
c) Total Coverage Ratio                                  3.8x                      
d) Free Cash Flow / Gross Adj. Debt                                  0.4%                      
Rating:                                                                  
a) Indicated Rating from Methodology                                  Ba1                      
b) Actual Rating Assigned                       Baa2                                 
                                                                 
Government-Related Issuer Factor                                                       
a) Baseline Credit Assessment 11                                                       
b) Government Local Currency Rating Baa1                                                       
c) Default Dependence Low                                                       
d) Support High                                                       


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