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Fitch Ratings Issues Downgrade Warning Over Mulled Tax Hike
March 24, 2016 09:46

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Fitch Ratings has warned the planned tax hike for oil and gas companies could lead to individual downgrades in the sector, says a recent paper.
According to the official statement, the recent oil price re-assessment will not have a direct impact on the ratings of Russian oil and gas companies.
“However, low oil prices have increased the probability of tax increases, which could result in deteriorating credit metrics and selective downgrades. Some ratings are also capped by the 'BBB-' sovereign rating, which has a Negative Outlook as falling oil has contributed to economic weakness,” reads the press release available on the Fitch Ratings’ website.
Lower assumptions that are likely to translate into higher projected leverages for the Russian O&G players will still be “moderate” and largely compensated by the flexible rouble exchange rate and the progressive tax regime.
The corporates’ key metrics are expected to broadly compliant with the requirements for the current ratings. 
“The only exception is Gazprom Neft (BBB-/Negative), which may see its FFO adjusted net leverage rising above 2.5x, due to its ambitious capex programme and a high proportion of FX-denominated debt,” says the paper.
However, the company’s connection with Gazprom and post-2016 improved leverage are likely to support the current rating going forward.
“Novatek's (BBB-/Negative) leverage should remain within the appropriate range for its rating. But the rating could be negatively affected by rising exposure to Yamal LNG if there are further delays in attracting project finance and the company keeps providing loans to the project,” the research paper goes on to say. 
What could change the rating landscape is higher taxes. That would cause higher leverage and weaker liquidity.
“The tax hike on the sector announced in October 2015 was relatively minor and will cost Russian oil companies 3%-7% of their dollar EBITDA, depending on oil prices”.
However, a mineral extraction tax hike put forward by the Ministry of Finance in February would have “more serious implications”, including a more than 20% drop in EBITDA.
Fitch Ratings concludes that energy companies would then probably need to tap more into the Russian banking system for liquidity support and to cut capex, which could weaken them operationally.


Author: Mikhail Vesely


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