S & P does not expect privatization of Georgian Oil and Gas Corporation in medium term
Tuesday, September 2
At the same time, we affirmed our 'B' short-term corporate credit rating on the company.
The upgrade reflects our revision of the company's stand-alone credit profile (SACP) to 'b' from 'b-'. This incorporates GOGC's track record of generating favorable operating cash flows and relatively high margins, based on its existing gas trading long-term contract structure, as well as our expectations that GOGC will continue posting positive results over 2014-2015 on the back of the existing contract mix and terms, according to the statement.
Our assessment of GOGC's SACP at 'b' is derived from its anchor of 'b', based on our assessment of a "weak" business risk profile and a "highly leveraged" financial risk profile, and a neutral impact from our analytical modifiers.
The long-term rating includes one notch of uplift to reflect our assessment that there is a very high likelihood of extraordinary government support for GOGC if needed from the Government of Georgia (BB-/Stable/B), based on our criteria for government-related entities (GREs), according to the statement.
The stable outlook reflects our view that the financial risks associated with GOGC's negative FOCF generation, sizable investment program, and potential cost overruns, will be mitigated by government support, above-industry-average profitability, and an adequate debt maturity profile.
"We view a debt-to-EBITDA ratio (including our adjustments) of less than 4x as commensurate with the current rating," according to the statement. "We assume that there will be no materially adverse changes in the terms and contract mix that would impair GOGC's margins and cash flow generation. We also assume that GOGC's importance for the Georgian government will not diminish and that the company will retain its status as the national oil company and will not be subject to privatization in the medium term. We also assume that GOGC will not provide any more loans to other GREs at the expense of its own financial profile."
Rating upside is limited in the next 12 months, as we anticipate heavily negative FOCF on the back of the Gardabani investments, and debt leverage remaining relatively high (about 4.0x).
"In accordance with our criteria for GREs, GOGC's SACP would need to be revised at least to 'bb-' in order to result in an upgrade, provided that the sovereign rating remains 'BB-' and the likelihood of support remains very high," according to the statement. "A one-notch upgrade of the sovereign would not lead to a similar action on GOGC, all else being equal."
"We could lower the ratings if the company's liquidity and maturity profile were not commensurate with the ratings, or if the debt-to-EBITDA ratio exceeded 4.0x or FFO to debt fell below 20%," according to the statement. "This could stem from increased investments or substantial negative changes in the current operational structure or contract scheme, leading to impaired earnings and cash flow generation. The latter, depending on the size of the impact, could lead us to reassess downward both the business risk profile and financial risk profile. A one-notch downgrade might be driven by a revision of our assessment of the likelihood of timely and sufficient extraordinary government support to moderately high from the current very high, provided the SACP remains at 'b'. Furthermore, a one-notch downgrade of the sovereign is likely to result in a similar rating action on GOGC."