Moody`s Investors Service today downgraded the Ba3 foreign currency corporate family rating ("CFR") and Probability of Default rating of NJSC Naftogaz of Ukraine ("Naftogaz") to B1 and concurrently assigned a Developing outlook. This rating action concludes Moody`s review for downgrade of Naftogaz`s ratings, according to a Moody’s press-release forwarded to UNIAN.
In line with the CFR, Moody`s also changed the rating of USD 500 million senior unsecured Loan Participation notes of Naftogaz from Ba3 to B1, the outlook is developing.
Today Moody`s also concluded a review of the sovereign ratings of Ukraine with the affirmation of the Ukraine`s B1 foreign and local currency debt ratings in conjunction with the assignment of a positive outlook which did not impact Naftogaz`s ratings. Please refer to press release dated August 8, 2008 for further information on Moody`s rating action relating to the Ukraine.
Moody`s rates Naftogaz in accordance with its rating methodology for Government Related Issuers ("GRI"s), thus the current ratings reflect a combination of the following inputs:
- Baseline credit assessment ("BCA") of 17 (on scale of 1-21, where 1 represents lowest credit risk, corresponding to a Caa1 rating);
- B1 local currency rating of the Ukrainian government;
- Medium dependence (changed from Low in conjunction with this rating action); and
- High support.
The downgrade of the CFR of Naftogaz follows Moody`s reassessment of the Dependence factor that plays a critical role in Naftogaz`s ratings. Moody`s has concluded that the Dependence factor (which reflects the degree to which the company`s and the state`s credit risk profiles share a common risk factor) should be changed to Medium from Low, primarily in view of Moody`s assessment that Ukraine`s moratorium risk is considered high (estimated by Moody`s at 60%).
The moratorium risk indicates the likelihood of the government to call upon the foreign exchange resources of domestic companies in the case of a government default. In addition, the shift of the Dependence factor reflects Naftogaz`s dependency upon the state and the possibility of interference of the latter in the company`s operations as well as the company`s susceptibility to political uncertainty. It also takes into account geopolitical factors such as the changing relationship between Ukraine and Russia and the ongoing intergovernmental gas price negotiations which are used as a political tool by both parties.
The outlook reflects the general uncertainties surrounding the longer term future of the company, in view of the on-going political instability in Ukraine, the status of gas price negotiations with Gazprom and the absence of visibility into Naftogaz`s operational and financial performance beyond 2008. The absence of information about the company that would allow Moody`s to make a definitive assessment relating to Naftogaz`s projected operational and financial performance, as well as uncertainty relating to Naftogaz`s future and its positioning in the context of the country`s future energy policies, create additional uncertainty over how the company`s BCA is likely to evolve. Timing of the resolution of the issues stated above is uncertain. The rating and outlook will ultimately be dependent upon further developments in the Ukraine (including those related to the upcoming elections in November 2009) and at the company`s level. Moody`s will continue to monitor the company`s performance to the extent possible, its compliance with furnishing of information covenants under the bond facility (this has been breached again, as Naftogaz failed to release 2007 financial results by end July 2008, as stipulated in the Bond documentation), and its working capital management including Naftogaz`s ability to attract additional financing for this purpose.
Naftogaz, headquartered in Kiev, Ukraine, is an integrated hydrocarbon company with operations in oil and gas exploration and production, domestic and international transportation, storage and supply. In 2006 the company generated revenue of Hryvnia 27.6 billion (app. USD 5.52 billion) and operating profit of Hryvnia 1.0 billion (app. USD 200 million), while net profit was negative at Hryvnia 2.2 billion (app. USD 440 million).
