TEXT-Fitch release on Bulgaria's Petrol

(The following statement was released by the rating agency)

July 9 - Fitch Ratings has today affirmed Bulgaria-based fuel distributor
Petrol AD's PETB.BB Long-term Issuer Default rating (IDR) and senior
unsecured rating for its EUR100m notes due in 2011 at 'B-' (B minus). The
Outlook for the Long-term IDR has been changed to Stable from Negative. The
Recovery Rating is affirmed at 'RR4'.
The change in Outlook reflects the company's improved liquidity position, lower
gross debt, reduced litigation risk and more transparent business relationship
with Lukoil Bulgaria, Petrol AD's major fuel supplier, following the closing of
a settlement agreement with Lukoil Bulgaria.
The company announced that the settlement agreement was signed on 12 March 2008
and confirmed to Fitch that it has been recently finalised; only a minor
remaining payment is to be received from Lukoil Bulgaria by end-July 2008.
According to the agreement, Petrol AD sold Lukoil Bulgaria assets consisting of
75 petrol stations and the storage base in Sofia, for EUR237m (BGN474m). The
agreement terminates the 15-year fuel supply contract, which had provoked
disputes, and clears all mutual legal claims. New, more transparent, supply
contracts for Petrol AD filling stations and the wholesale segment have been
signed.
Fitch notes the improved liquidity position of Petrol AD, as most of the
proceeds from asset disposals were received from Lukoil Bulgaria in cash,
allowing Petrol AD to repay its working capital facilities. Petrol AD has
sufficient liquidity to repay its short-term debt, including the BGN15m bonds
maturing in November 2008.
The disposal of assets to Lukoil Bulgaria results in a 34% reduction of oil
product volumes sold, negatively affecting cash flows. The company's market
share in the retail segment decreased to 16.5%, from 21% before the disposal.
Petrol AD's management intends to use the disposal proceeds to replace the lost
fuel volumes within several months. The Stable Outlook reflects Fitch's
assumption that the lost volume and earnings will be substituted by
acquisitions made on the Bulgarian market, as well as by investments in Petrol
AD's network. There is, however, a high reinvestment risk connected with
effective spending of cash proceeds and successful replacement of the oil
products' volume. Furthermore, there are certain constraints for Petrol AD
under the EUR100m bond documentation related to spending proceeds from asset
disposals within one year and required credit quality for temporary cash
investments. Fitch will monitor the company's compliance with the bond
indenture.
Petrol AD has a weak financial profile and aggressive financial policy,
below-average accounting quality (qualified audit opinion) and sizeable capital
spending to replace the oil products' volume. Its profitability continues to be
volatile. Fitch believes that operating EBITDA in FYE08 could be substantially
lower than that reported in 2007 (BGN40m) due to cash flow loss driven by asset
disposals. As a result, gross debt to EBITDA may deteriorate beyond the limits
for the current rating category, but this is mitigated by the net cash position
forecasted at FYE08 by Petrol AD.
The ratings continue to reflect the group's below-average business profile due
to its small size, exposure to a single country and lack of vertical
integration. The ratings also reflect weak corporate governance. Petrol AD's
controlling shareholder, Petrol Holding AD, is privately owned and both
companies engage in sizeable related-party transactions, including
inter-company loans, debt guarantees and purchasing of treasury shares by
Petrol AD's subsidiaries.
Fitch's Recovery Ratings (RR), introduced in 2005, are a relative indicator of
creditor recovery on a given obligation in the event of a default. A broad
overview of Fitch's RR methodology as it relates to specific sectors, including
a Case Study webcast, can be found on the agency's website,
www.fitchratings.com/recovery.
(New York Ratings Team)