ACRA assigns BBB(RU) to “Slavyansk ECO” LTD, outlook Stable

The credit rating assigned to “Slavyansk ECO” LTD (hereinafter, Slavyansk ECO, or the Company) is based on its strong geographical diversification, high level of corporate governance, as well as medium assessments of the Company’s business profile, size, profitability, debt load, debt service costs, liquidity and cash flow. The rating is constrained by the weak assessment of the Company’s market position.

Slavyansk ECO is an oil refining company that specializes in primary (atmospheric units) and secondary (vacuum unit) oil refining. The Company supplies petroleum products both to the domestic market, and for exports. The Company’s key asset is the Slavyansky refinery (the current refining capacity is up to 4.5 mln tons per year), which is located in the town of Slavyansk-on-Kuban in the Krasnodar Krai. The Company’s key beneficiary is R. V. Paranyants.

Key rating assessment factors

Weak market position, medium business profile and strong geographical diversification. The Company is a competitive player in the fragmented global petroleum product market. According to ACRA estimates, the share of the Slavyansky refinery in the total volume of oil refining in Russia will total nearly 1.1% by the end of 2020. Compared to its global counterparts, the Company’s production costs are estimated by ACRA as very low due to new efficient production capacities, as well as access to cheap raw materials, labor and energy. The Company’s product line is moderately diversified; Slavyansk ECO is able to regulate the parameters of primary refined products within reasonable limits. At the same time, the share of high added-value products in the Company’s product line is very low, and its increase is only expected when the program of the construction of secondary refining capacities is completed. ACRA notes an extremely favorable geographical location of the Company’s production facilities, i. e. the proximity to the Black Sea ports allows it to significantly reduce transport costs and positively affects the Company’s competitiveness in the global market. At the same time, concentration of production on one plant constrains the geographical diversification assessment.

The strong corporate governance assessment is based primarily on the successful implementation of the Company’s development strategy. Slavyansk ECO is one of the few companies that recently managed to successfully implement the construction of an independent oil refinery from scratch. The Slavyansky refinery was founded in 2011. Since 2015, a project is being implemented to build a new phase and improve the level of processability of the plant. In 2019, an agreement on the modernization (construction) of oil refining facilities was signed with the Russian energy ministry. By the end of 2025, Slavyansk ECO plans to commission gasoline hydrotreater units (1 049 thousand tons per year), catalytic reforming (665 thousand tons per year) and isomerization (335 thousand tons per year). In accordance with the modernization agreement, the Company is the recipient of the reverse excise tax on oil. According to ACRA estimates, revenues from the reverse excise tax will amount to around half of the Company’s EBITDA in 2021–2023.

Medium debt load and medium interest payment coverage. According to ACRA estimates, the weighted average ratio of the Company’s total debt to FFO before net interest payments for 2018–2023 will be 2.1x. The main source of financing capital expenditures under the modernization agreement will be the Company’s own funds. No significant increase in the debt load is expected. According to the Agency, the qualitative assessment of the Company’s debt load is below medium due to dependence on the largest lender — JSC Russian Agricultural Bank, which share in the Company’s total debt portfolio is nearly 90%. According to ACRA estimates, the weighted average ratio of FFO before net interest payments to net interest payments for 2018–2023 will be 4.9x.

Medium liquidity and medium cash flow. Almost all of the Company’s debt is shortterm and is repayable within a year. At the same time, when calculating the current liquidity ratio ACRA takes into account the confirmed limit from JSC Russian Agricultural Bank totaling RUB 31.87 bln (the limit exceeds the total amount of the Company's debt by more than one and a half times). According to ACRA estimates, the weighted average FCF margin for 2018–2023 will be 0.7%, while the weighted average ratio of capital expenditures to revenues will total 4.

Key assumptions

  • Average annual price of Russia's flagship Urals oil grade rising up to USD 52/bbl. and the USD/RUB exchange rate falling to 69 in 2023;
  • No dividend payments in 2021–2023;
  • Implementation of the capital investment program and availability of reverse excise tax revenues under the agreement with the Russian energy ministry.

Potential outlook or rating change factors

The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.

A  positive rating action may be prompted by:

  • Weighted average ratio of total debt to FFO before net interest payments falling below 1x;
  • Weighted average ratio of FFO before net interest payments to net interest payments rising above 5x.

A  negative rating action may be prompted by:

  • Weighted average ratio of total debt to FFO before net interest payments rising above 3.5х;
  • Weighted average ratio of FFO before net interest payments to net interest payments falling below 2.5х;
  • Non-compliance with the schedule of capital expenditures under the agreement with the Russian energy ministry and therefore no reverse excise tax revenues.

Rating components

SCA: bbb.

Adjustments: none.

Issue ratings

There are no outstanding issues.

Regulatory disclosure

The credit rating has been assigned to “Slavyansk ECO” LTD under the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Non-Financial Corporations under the National Scale for the Russian Federation and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities.

A credit rating has been assigned to “Slavyansk ECO” LTD for the first time. The credit rating and its outlook are expected to be revised within one year following the publication date of this press release.

The credit rating was assigned based on the data provided by “Slavyansk ECO” LTD, information from publicly available sources, as well as ACRA’s own databases. The credit rating is solicited, and “Slavyansk ECO” LTD participated in its assignment.

No material discrepancies between the provided data and the data officially disclosed by “Slavyansk ECO” LTD in its financial statements have been discovered.

ACRA provided no additional services to “Slavyansk ECO” LTD. No conflicts of interest were discovered in the course of credit rating assignment.

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