(The following statement was released by the rating agency)
LONDON/WARSAW, November 13 (Fitch) Fitch Ratings has assigned Polish oil
refining and marketing company Polski Koncern Naftowy ORLEN S.A.'s (PKN;
BBB-/Stable/A-(pol)/Stable) domestic four-year PLN100m bonds a National senior
unsecured rating of 'A-(pol)'. A full list of PKN's ratings is provided at the
end of this commentary.
This is PKN's fourth issue within its PLN1bn bond programme. The bonds
constitute senior unsecured obligations of PKN. There are no financial covenants
included in the bond documentation.
KEY RATING DRIVERS
Improved Financial Profile
The ratings reflect PKN's improved financial profile following several measures
taken by management to reduce leverage, including the disposal of Polkomtel S.A.
in 2011 (after-tax proceeds of PLN3.2bn (USD1bn)), and its modest capex in
2011-2013 after a capex-intensive period in 2007-2010. These factors help
support PKN's creditworthiness amid still difficult conditions for the European
oil refining sector due to overcapacity and weak demand.
Fitch views PKN's strategy update announced in November 2012 as supportive of
the company's credit profile. One of PKN's strategic targets is to maintain
credit ratios at a sound level, including a gearing ratio below 30% and covenant
net debt-to-EBITDA below 1.5x. While the capex plan for 2013-2017 of PLN22.5bn
is about 50% higher than in 2008-2012, the company also expects an increase in
EBITDA of about 60% in this period partly due to investments. Fitch views
positively that PLN6.9bn of the planned capex for 2013-2017 is discretionary
(mostly in the upstream and energy segments) and may be deferred or cancelled if
cash flows are weaker than expected. The recently announced acquisition of
Canadian upstream company TriOil Resources Ltd. for PLN563m (USD179m) is within
PKN's planned capex for 2013.
In line with its updated strategy, PKN reinstated dividend payments in 2013
after not paying them in 2009-2012. The company is planning a gradual increase
in dividends in the next few years so that each payout will be up to 5% of
average market capitalisation in the preceding year. However, dividend payouts
will depend on the company's financial position and the economic environment.
Improved Financial Flexibility
Fitch believes that PKN has much greater flexibility to reduce its capex than in
2007-2010, when it made some major committed investments. The agency views
positively PKN's proven ability to manage working capital changes in line with
changes to its financial position. This would provide additional flexibility for
the company, particularly if industry conditions weaken, leading to a
deterioration of reported credit ratios to potentially close to the covenant
level defined in the main bank loan agreements.
Most of PKN's EBITDA is generated in two highly cyclical sectors: oil refining
and petrochemicals (each generating about 40% of 2011-2012 EBITDA before
inventory holding gains/losses and before impairments). The remaining 20% of
EBITDA comes from the more stable fuel retailing business. Fitch views PKN as a
refining company with high business diversification, in light of its substantial
petrochemical operations and its strong position in fuel retail sales.
Diversification may help mitigate cash flow cyclicality, as seen in 2011 and
1H13 results, where solid performance in the petrochemicals segment supported
PKN's cash flow at a time of weaker refining profits.
Positive: Rating upside potential is currently limited. However, positive rating
action may result from a material improvement in the company's business profile
resulting in lower cyclicality of operating cash flows, with funds flow from
operations (FFO) adjusted net leverage not exceeding 2.0x. This credit ratio is
calculated by Fitch excluding the effect of inventory holding gains/losses and
reversing the sale of compulsory crude oil inventory to third parties.
Negative: Future developments that could lead to negative rating actions
- A deterioration in cash flows and an increase in FFO adjusted net leverage
(excluding inventory holding gains/losses and compulsory crude stock sales) to
above 2.5x on a sustained basis due, for example, to substantially
weaker-than-expected conditions for refining and petrochemicals operations.
- Capex substantially above FFO resulting in highly negative free cash flow in
the medium term
- Aggressive dividend policy
LIQUIDITY AND DEBT STRUCTURE
Ample Liquidity and Sufficient Funding until 2017
At end-June 2013, short-term debt of PLN2.8bn was covered by cash of PLN4.6bn,
and unused committed medium and long-term bank facilities of about PLN10bn,
which mostly expire between 2016 and 2018. PKN's debt maturity profile is not
onerous, with no major repayments due until 2016. Given its large available
committed long-term funding, the company has no need to raise new external
funding until 2016. At end-June 2013 the company had sufficient headroom within
its financial covenants.
Strong Access to Debt Markets
PKN has strong access to the bank loan and domestic bond markets. The company
recently extended the maturity of its EUR2.6bn syndicated bank loan facility,
PKN's main funding source, to 2017 (EUR2.1bn) and 2018 (EUR0.6bn) from 2016. It
also issued four-year domestic bonds of PLN0.6bn in May-June and November 2013.
The bond issue was placed among retail investors with a coupon of WIBOR plus
margin from 140 bps to 150 bps, which is comparable with bond coupons paid by
some Polish electric utilities rated in the 'BBB' category.
Bank Loans Dominate Debt Structure
PKN group's debt of PLN9.7bn at end-June 2013 mostly comprised bank loans (82%
of total debt) and bonds (18%). The company plans to increase the share of bonds
in the funding structure in the next few years through the issuance of domestic
bonds and eurobonds.
FULL LIST OF RATINGS
Long-term foreign and local currency Issuer Default Rating (IDR) 'BBB-'; Stable
Short-term foreign and local currency IDR 'F3'
Foreign and local currency senior unsecured rating 'BBB-'
National Long-term rating 'A-(pol)'; Stable Outlook
National senior unsecured rating 'A-(pol)'
+48 22 3386 295
+48 22 338 6286
Fitch Polska S.A.
+44 20 3530 1033
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