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Feb 17 (The following statement was released by the rating agency)
Fitch Ratings has assigned Gaz Capital S.A.'s (Gaz Capital) loan participation notes (LPNs) an expected senior unsecured 'BBB(EXP)' rating. The planned notes are the 35th series euro-denominated notes to be issued under Gaz Capital's USD40bn debt issuance programme rated 'BBB' by Fitch. The final rating is contingent upon the receipt of final documentation conforming materially to information already received and details regarding the amount and tenor.
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 noteholders will rely solely on Gazprom's credit and financial standing for the payment of obligations under the notes.
Gazprom's ratings reflect our expectations that in the medium term it will continue benefiting from at least flat European gas sales under long-term contracts with gas prices largely linked to those of oil products. We also expect that European gas contracts will gradually incorporate higher spot price component and other concessions to off-takers. Despite the end of monopoly on liquefied natural gas (LNG) exports from Russia, Gazprom's large production and conservative debt profile give it enough flexibility to maintain strong credit metrics.
We currently do not incorporate any upside from the anticipated gas contract with China as we estimate that Gazprom may start delivering gas there in 2018 at the earliest. In our view, the domestic gas market liberalisation will have a limited positive impact on Gazprom's profits due to lower tariff increases and continuing loss of market share to other gas producers. Gazprom's ratings are capped by the sovereign rating of the Russian Federation (BBB/Stable).
KEY RATING DRIVERS
Strong Operating Profile
Gazprom's ratings reflect its strong operating profile. It accounts for 15% of the world's gas production and meets over a quarter of gas demand in Europe. It benefits from low uplift costs, and high reserve life and replacement rate. We believe that Gazprom's expected sales diversification into China and LNG would enhance its business profile in the long term. Gazprom currently still has an exclusive right to export pipeline natural gas from Russia.
Oil-Linked Prices Remain
In 2013, Gazprom's sales to Europe, its principal market by value, increased to 161bn cubic meters (bcm), up 15% yoy, compared with a 7% drop in 2012. We expect that Gazprom will continue benefiting from European gas sales under long-term contracts with prices largely linked to those of oil products. Currently, only a small percentage of Gazprom's supply contracts have linkage to spot prices, mainly in north-west Europe. While we expect continued pressure from European off-takers on pricing and other terms, we believe that Gazprom has sufficient flexibility to accommodate some additional concessions to buyers without jeopardising its strong credit metrics.
Domestic Market under Pressure
We believe that the domestic gas market liberalisation in Russia will have a limited positive impact on Gazprom's bottom line due to lower domestic tariff increases and continuing loss of market share to other gas producers, mainly OJSC OC Rosneft (BBB-/Stable) and OAO Novatek (BBB-/Stable), both of which have ambitious plans to increase gas production and launch LNG projects in Russia in the second half of this decade. We do not expect any annual domestic gas price indexation in 2014 and no more than 7%-8% in 2015-2016, compared with 15% annual rises until now. We also expect that Gazprom will maintain its monopoly on pipeline gas exports over the medium term despite the liberalisation of LNG exports from Russia that took place in 2013.
Sovereign Caps Standalone Ratings
We rate Gazprom on a standalone basis according to its parent and subsidiary rating linkage. We consider that Gazprom's standalone ratings are in the high 'A' category, limited by country-specific corporate governance issues and its concentration of production in one country. Additionally, Gazprom's ratings are capped by that of the Russian Federation. We expect this approach to remain intact over the medium term at least.
Positive: A positive rating action is unlikely at present, given the current sovereign rating.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Material deterioration of the credit metrics, e.g., funds from operations (FFO) net adjusted leverage above 2.5x and FFO fixed charge cover of below 8x on a sustained basis due to a prolonged decline in oil and gas prices, an aggressive capex programme or sizable acquisitions. Our base case forecast indicates that FFO net adjusted leverage will remain below 1.5x and FFO fixed charge cover above 10x in 2013-2014.
LIQUIDITY AND DEBT STRUCTURE
Fitch views Gazprom's liquidity at 30 September 2013 (latest available IFRS accounts) as solid, with its unrestricted cash position of RUB571bn more than sufficient to cover its short-term debt of RUB374bn at that date.
We consider Gazprom's debt maturity structure as comfortable. As a major Russian corporate borrower, it benefits from solid access to debt capital markets. Most of Gazprom's borrowings are in US dollars or euros, but we assess its currency mismatch risk as limited as a significant part of Gazprom's revenue is formed of foreign currency proceeds from export sales.
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