Moody's downgrades Nayara Energy to Ba3 with negative outlook

Moody's Investors Service on Friday downgraded the ratings of Nayara Energy to Ba3 from Ba2 and also changed the outlook to negative from stable.

Formerly Essar Oil, Nayara is controlled by the Russian state-owned lender VTB and oil giant Rosneft along with a clutch of funds after they bought the debt-laden Ruias out in August 2017 for over USD 13 billion.

"The downgrade to Ba3 reflects the significant deterioration in Nayara's corporate family credit metrics, driven largely by the weak refining margin environment in Asia," Moody's said in a note.

The weak industry conditions are reflected in the Singapore benchmark refining margins, which declined to around UD3.4/bbl for the June 2019 quarter, from USD4.9/bbl in FY19 and USD 7.2/bbl in FY18, the agency noted.

"The weakness in refining margins is attributable to weak product demand as well as high differential between Brent and West Texas Intermediate crude prices, which kept feedstock cost elevated for Asian refiners, it added.

Nayara's operating performance was further affected by the planned maintenance shutdown in December, leading to lower throughput and capacity utilisation.

In addition, the implementation of new accounting standards has resulted in higher leverage and further weakened the credit metrics, the report said.

Nayara's leverage increased to 6.3x for last 12 months to June 2019 from 3.9x in FY18, and interest cover declined to 1.5x from 2.1x over the same period.

However, tightening regulations on the use of heavy fuel oil in the shipping industry from January 2020 will result in an increase in demand for middle distillates and thus lead to some recovery in refining margins, the note said.

"We expect Nayara to benefit from the new regulations given its high proportion of light and middle distillate output," it said, adding in addition, the expansion of its fuel retail network along with the deployment of surplus cash towards debt reduction will support further improvement in its profitability and credit metrics.

"While we expect Nayara's credit metrics to improve over the next 12-18 months, they will continue to remain weakly positioned ," the note said, adding in particular, the leverage is expected to improve to 4.7x by March 2021, and the interest cover to around 1.8x over the same period.

Negative outlook reflects that the regional refining margin environment continues to remain uncertain and could delay improvement in Nayara's credit metrics from current levels, the note concluded.