Moody's Rates Sovcomflot Ba2: Negative Financial Outlook

By George Backwell July 4, 2014

Moody's Investors Service says it has confirmed the Ba2 corporate family rating (CFR) and the Ba2-PD probability of default rating (PDR) of Sovcomflot JSC with $800 million of rated debt affected.

Concurrently, Moody's has confirmed Sovcomflot's Ba3 senior unsecured issuer rating and the Ba3 senior unsecured rating assigned to the $800 million Eurobond issued by SCF Capital Limited, which is a 100% indirect subsidiary of Sovcomflot (Sovcomflot guarantees the Eurobond). The outlook on all ratings is negative.

Ratings Rationale
This confirmation of Sovcomflot's ratings reflects Moody's expectation that the company will be able to improve its financial metrics over the next 12-18 months, as a result of (1) the completion of a number of new vessels that start generating EBITDA and (2) a temporary improvement in trading conditions in the international crude oil shipping market in the first quarter of 2014.

As Sovcomflot is a 100% state-owned company, Moody's applies its Government-Related Issuer (GRI) rating methodology in determining the company's CFR. According to this methodology, the rating is driven by a combination of (1) Sovcomflot's baseline credit assessment (BCA), which is a measure of standalone credit strength, of b2; (2) the Baa1 local currency rating of the Russian government; (3) the low default dependence between Sovcomflot and the government; and (4) the strong probability of provision of state support to the company in the event of financial distress.

The negative outlook on the ratings reflects Moody's concern that the recovery of Sovcomflot's financial metrics to the levels commensurate with its b2 BCA and Ba2 CFR, may take longer than expected because of continuing challenging market environment. A downgrade could be considered if the company does not reduce its leverage to 6.5x adjusted debt/EBITDA while maintaining adjusted funds from operations (FFO) interest coverage at 3.0x over the next 12 to 18 months.

Source: Extracted from Moody's Global Credit Research 4, July 2014