Fitch Assigns Gazprom’s LPNs Final ‘BBB’ Rating
Fitch Ratings has assigned Gaz Capital S.A.’s loan participation notes (LPNs) a final senior unsecured ‘BBB’ rating.
The EUR1bn 3.389% notes due 2020 are the 30th series and the EUR500m 4.364% notes due 2025 are the 31st series issued under Gaz Capital’s USD40bn debt issuance programme rated ‘BBB’ by Fitch.
The LPNs are issued on a limited recourse basis for the sole purpose of funding a loan by Gaz Capital to OAO Gazprom (‘BBB’/Stable). The proceeds from the loan are expected to be used by Gazprom for general corporate purposes. The noteholders will rely solely on Gazprom’s credit and financial standing for the payment of obligations under the notes. Gaz Capital is a special purpose financing vehicle of Gazprom, but is not directly or indirectly a subsidiary.
Strong Operating Profile
OAO Gazprom’s ratings reflect its strong operating profile. It accounts for 15% of the world’s gas production and supplies over a quarter of the gas consumed in Europe. It benefits from low uplift costs, and a high reserve life and reserve replacement rate. Fitch believes that further diversification into China and liquefied natural gas (LNG) would enhance the group’s business profile. Gazprom has an exclusive right to export natural gas from Russia, but its LNG export monopoly is under pressure from independent gas producers.
Long-Term Price Arrangement In Europe
Fitch expects that at least in the medium term Gazprom will continue to benefit from European gas sales under long-term contracts with prices largely linked to oil products prices. While Fitch anticipates continued pressure from off-takers on pricing terms under Gazprom’s long-term European contracts, due to the challenging economic environment, the agency believes that Gazprom has sufficient flexibility to accommodate some potential concessions without jeopardising its credit metrics.
2013 Weak European Demand
Gazprom continues to face soft demand for gas in western Europe, its principal market, where its gas sales declined by 7 % in 2012 to 140 billion cubic metres (bcm) from 150bcm in 2011. Fitch expects that gas demand in Europe will continue to be weak in 2013 due to an expected decline in eurozone GDP in 2013 by 0.1%, but may start increasing in 2014 boosted by eurozone GDP growth of 1.2% in 2014, as forecast by Fitch.
Fitch rates Gazprom on a standalone basis according to its parent and subsidiary rating linkage methodology. The Gas Supply Law stipulates that the Russian Federation (‘BBB’/Stable) must own at least 50% plus one share in a company that owns Russia’s Unified Gas Supply System, i.e., Gazprom. Fitch expects this to remain the case over the medium term.
Large Capex Expected
Gazprom plans to invest around RUB1,200bn annually over 2013-2015. The annual capex for the gas division is earmarked at RUB700bn-RUB900bn over 2013-2030 with almost half dedicated to gas transportation projects. Fitch believes that the execution and cost overrun risks inherent in Gazprom’s ambitious investment programme are mitigated by a high degree of capex flexibility as the company can delay its expansion projects in response to market conditions and aims at maintaining at least a neutral free cash flow (FCF) position.
Ratings Constrained by Sovereign’s
Gazprom’s Long-Term foreign currency Issuer Default Rating (IDR) and Stable Outlook are constrained by the Russian sovereign ratings.
Positive: Future developments that could lead to positive rating actions include:
Financial profile improvement and business profile diversification (eg, gas sales to China and/or LNG sales) could be positive for Gazprom’s ratings.
Negative: Future developments that could lead to negative rating actions include:
Credit Profile Deterioration
Funds from operations adjusted leverage well above 2x due to capex, M&A or shift of gas export contracts to spot prices would be negative for Gazprom’s ratings.
At 30 September 2012, Gazprom had RUB1,632bn in gross unadjusted debt. Its cash and cash equivalents of RUB471bn fully covered its short-term debt of RUB386bn on that date. Its EBITDA leverage remained under 1x in 2010-2011.
Fitch views Gazprom’s liquidity as adequate. Gazprom is the leading Russian corporate borrower and enjoys access to domestic and international debt capital markets.
LNG World News Staff, April 04, 2013