Moody’s has changed to stable from negative the outlook on the Ba2 corporate family rating and the Ba2-PD probability of default rating of Sovcomflot (SCF), a 100% state-owned energy shipping company and provider of seaborne energy solutions domiciled in Russia. Concurrently, Moody’s has affirmed these ratings.
Today’s stabilisation of the outlook on SCF’s Ba2 CFR follows Moody’s decision to change the outlook on Russia’s Ba1 government bond rating to stable from negative on 4 December 2015. Please see press-release at https://www.moodys.com/research/–PR_339462.
At the same time, Moody’s upgraded to Ba3 from B1 SCF’s senior unsecured issuer rating and the senior unsecured rating of the $800 million Eurobond issued by SCF Capital Limited and guaranteed by SCF on the back of improvements to the company’s standalone credit quality (assessment raised to b1 from b2) and subsequent strengthening of its position within the current Ba2 rating category. The outlook on these ratings is stable.
Today’s outlook change to stable primarily reflects the stabilisation of the outlook on the sovereign rating of the Russian Federation, the company’s support provider, as well as the company’s strengthened standalone positioning, which in Moody’s estimate will be sustainable.
SCF’s position as a 100% state-owned company means that Moody’s rates the company under its government related issuer (GRI) methodology. According to this methodology, SCF’s Ba2 rating is driven by a combination of (1) its baseline credit assessment (BCA) of b1, a measure of standalone credit strength; (2) the Ba1 government bond rating of Russia, with a stable outlook; (3) the low default dependence between SCF and the Russian government; and (4) the strong probability of provision of state support to the company in the event of financial distress.
As part of the action, Moody’s has raised SCF’s BCA to b1 from b2, reflecting material improvement in the company’s operating environment, its financial performance and financial metrics. SCF’s b1 BCA is supported by: (1) favourable dynamics in the crude oil and oil products marine shipping segment, in which SCF primarily operates; (2) the company’s market position as the world’s number two owner of tankers in terms of the number of vessels, and the company’s young fleet with an average age of eight years; (3) material improvements in time charter equivalent (TCE) revenue and margins thanks to higher rates and lower bunker fuel costs; (4) good cash flow visibility as two-thirds of revenue originate from long-term charters as opposed to the spot market; (5) relatively moderate fleet maintenance costs; and (6) revenue growth potential from fleet additions and growing diversification into the liquefied natural gas (LNG) shipping and offshore services.
The company’s revenue in the last 12 months ended 30 September 2015 increased by 17% and Moody’s adjusted EBITDA and cash flow from operations (CFO) by 80% compared with 2013. The company’s leverage measured by adjusted debt/EBIDA decreased to 4.0x and retained cash flow/debt improved to 19.3% as of end-September 2015 from 6.9x and 12% as of end-2013, respectively. Given that tanker fleet additions slowed down and should remain moderate in 2016-17, and market demand in the tanker segment should remain steady in the next 12 months driven by the low oil prices and increased refining activity, Moody’s expects the metrics to further improve based on full-year 2015 results and remain sustainable in 2016-17.
SCF’s standalone credit profile is constrained by (1) negative free cash flow generation, which Moody’s expects to continue into 2016-17 due to SCF’s extensive investment of $500-$600 million a year into new vessels construction; (2) vulnerability of SCF’s cash flow to the volatile marine charter rates, and (3) liquidity concerns associated with Eurobond refinancing risks.
Moody’s notes that the currently positive balance of supply and demand in the tanker market remains fragile. A material ramp-up in investment into new shipping capacity, and/or a slowdown in the positive momentum in the oil and oil products shipping turnover would weigh on charter rates over the 18-24 months.
Moody’s has reduced the notching between the senior unsecured rating of the SCF guaranteed bond and its CFR to one notch from two by upgrading the bond’s rating to Ba3 from B1. A large amount of SCF’s debt (approximately 70%), is raised by the company’s operating subsidiaries and is secured by vessels, which brings it higher in relative priority ranking to the unsecured instrument.
Although Moody’s acknowledges a degree of subordination of the rated instrument, it believes that the GRI support, if required, will likely apply across all tranches of debt, should the government step in to help avoid a default. In addition, the agency takes into account the fact that the issuer’s unencumbered asset value more than twice exceeds the amount of the bond.
WHAT COULD CHANGE RATINGS UP/DOWN
Improvements in the company’s financial and liquidity profile, in particular the elimination of the risks associated with the refinancing of the company’s bond in the fourth quarter of 2017, would have a positive impact on SCF’s standalone assessment. This, subject to no adverse changes to the support and dependence assumptions, might translate into a positive rating action for the CFR.
Conversely, unfavourable developments at the support provider (the government of Russia) level, and/or a deterioration in the company’s standalone credit profile so that its adjusted debt/EBITDA rises above 6.5x and its adjusted funds from operations interest coverage declines below 3.0x on a sustained basis would put negative pressure on the ratings. Lack of progress on the refinancing of the bond within the next 12 months would elevate Moody’s concerns over SCF’s liquidity profile.
The principal methodology used in these ratings was Global Shipping Industry published in February 2014. Other methodologies used include the Government-Related Issuers methodology published in October 2014. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.