Fitch Ratings said on Tuesday ithas affirmed Romania-based KazMunayGas
International NV's (KMGI) long-term issuer default rating (IDR) at 'B+', with a
stable outlook.
The rating of KMGI, formerly The Rompetrol Group,is
based on a bottom-up approach in line with Fitch's parent and subsidiary rating
linkage methodology, the rating agency said in a statement.
Fitch also
said in the statement:
"The rating reflects the company's standalone
credit profile, assessed at 'CCC' due to the weak financial profile (end-2014:
funds from operations (FFO) adjusted net leverage of 36x), and a three-notch
uplift for parental support from JSC National Company KazMunayGas (NC KMG;
BBB/Stable).
KEY RATING DRIVERS
- Relatively Strong 2014
Results
- In 2014, KMGI generated positive annual Fitch-adjusted free
cash flow (FCF) for the first time since 2002. Better market conditions in 2H14
and improved operational profile of the Petromidia refinery after its
modernisation completed in 2012 resulted in the average net operating margin at
the refinery increasing to USD3/bbl in 2014, up from USD1.5/bbl in 2013, and the
good performance of retail and trading segments. Significant working capital
cash inflows and a 51% capex reduction yoy further supported cash flows. A
longer track record of improved financial performance could lead to an upgrade
of KMGI's standalone rating, especially if the contingent liabilities associated
with a dispute with the Romanian government are cleared.
- Share Buyback
Delayed
- KMGI's repurchase of around 27% of Rompetrol Rafinare S.A.'s
(RRC) shares from the government for USD200m did not take place in 2014, as the
company previously expected. Fitch understands the transaction needs to be
initiated by the government, which has not taken place yet. In KMGI's view, the
repurchase is likely to be finalised in 2016. Fitch assumes that NC KMG will
support KMGI in financing the share repurchase through a shareholder loan or a
debt guarantee, further demonstrating parental assistance.
Parent
Support
- Fitch assesses the strategic and legal ties between KMGI and NC
KMG as moderate to strong, whilst operational ties are moderate, which supports
the three-notch uplift to KMGI's standalone rating. The legal ties include a
direct guarantee of KMGI's debt (USD200m) and a cross-default provision in the
documentation for NC KMG's USD7.5bn Global Medium-Term Note Programme, which
also relates to KMGI's debt. Historical financial support has taken the form of
a USD1.1bn cash injection as a capital increase, and shareholder loans
(USD0.9bn) converted into the 51-year hybrid loan.
Expansion of Retail
Development Strategy
- KMGI is keen to improve its integrated
distribution (retail and wholesale) network domestically, having completed the
upgrade of its Petromidia refinery. KMGI will focus on the Romanian market,
where it plans to open 96 new filling stations between 2014 and 2019. KMGI
opened one new station in Romania in 2014 and plans to open 15 new stations in
2015. The company believes it is in a position to increase market share in
Romania from its approximate 28% share (15% retail). In Fitch's opinion, KMGI
will benefit from a greater share of the domestic market if the expansion
programme is achieved with moderate capex requirements.
Favourable
European Refining Environment
- European refining margins started to
recover in July 2014 after Brent began its fall from USD112/bbl. In 1Q15 the
north-west European refining margin averaged USD7.6/bbl, up from USD4.1/bbl in
1Q14 and from USD5.9/bbl in 4Q14. Healthy fuel demand in recent months exceeded
market expectations and supported margins, but this was partly driven by
temporary factors including opportunistic trading. Overcapacity and strong
competition from refiners in oil producing countries may put pressure on
European margins later this year.
Hybrid Loan Treated as Debt
-
Fitch treats the 51-year hybrid loan from KazMunayGas PKOP Investment B.V.
(outstanding balance at end-2014 of USD0.9bn) as debt because interest payments
are not deferrable if the company returns to profitability and starts paying
dividends. FFO adjusted net leverage excluding shareholder financing totalled
13.9x at FYE14 (15.6x in FYE13).
KEY ASSUMPTIONS
- Fitch's key
assumptions within our rating case for the issuer include:
- - Annual
EBITDA of approximately USD150m.
- - Improved leverage metrics on the
back of higher cash flow generation.
- - Support for NC KMG for
repurchase of RRC shares.
RATING SENSITIVITIES
- Positive: Future
developments that may, individually or collectively, lead to positive rating
action include:
- -Improvement in KMGI's standalone financial profile
away from the 'CCC' rating category.
- -Increased cash flow generation
from an improving business profile.
- -A longer debt maturity
profile.
Negative: Future developments that may, individually or
collectively, lead to negative rating action include:
- - Reduced support
from NC KMG.
- - Liquidity crisis related to cash flow
difficulties.
- - Large debt-financed acquisitions at the KMGI
level.
- - Large debt-financed capital expenditure at the KMGI
level.
LIQUIDITY AND DEBT STRUCTURE
- At end-2014, KMGI's
short-term debt was USD543m against an unrestricted cash balance of USD141m.
Fitch assumes KMGI will be able to extend a significant portion of short-term
credit lines with international and domestic relationship banks in 2015. The
company's liquidity is supported by USD168m of committed undrawn credit
facilities at end-2014.
In March 2015, KMGI has signed a USD360 credit
facility, which will be used to refinance its existing loans. The facility
includes a USD240m three-year committed revolving credit line and a one-year
USD120m uncommitted overdraft. Fitch views the increase in the average tenor of
KMGI's debt portfolio as positive for the company's financial profile."