S&P Says Norilsk May Keep Higher Rating as Russia Cut

OAO GMK Norilsk Nickel, Russia’s largest mining company, may remain an investment grade credit, even after Standard & Poor’s cut the nation’s foreign-currency rating to junk.

“We think that Norilsk Nickel’s rating may be one level higher than the sovereign,” S&P analyst Alexander Griaznov said by phone today. Some state companies that were placed on rating review in late December will probably be downgraded, while S&P will have “discussions” over the possibility of some private firms, including OAO Lukoil, keeping a higher rating, he said.

Russia is trying to jumpstart its stagnant debt market after sanctions over the Ukraine conflict and slumping oil sent borrowing costs soaring the most among major emerging markets in the past 12 months, forcing it to cancel 27 bond sales. The country needs cash to help finance its biggest budget deficit as a percentage of economic output since 2010 as the threat of recession looms. S&P lowered Russia’s rating one step to BB+ yesterday, leaving it at junk for the first time in a decade.

Norilsk said last week it hopes S&P will keep its rating, given the company’s strong financial position and comfortable debt level. The company had $2.4 billion of free cash flow at the end of the first half and net debt of $3.46 billion with a ratio to earnings before taxes, interest, depreciation and amortization of 0.8.

“We see that the cost of our borrowings increased by 50 to 100 basis points, but the credit markets are still open for us,” Chief Executive Officer Vladimir Potanin said on Jan. 22. “We are actively working with rating agencies to keep our investment rating even if Russia will be downgraded.”

Norilsk has said it doesn’t have any covenant that requires the company to pay down debt should the rating be changed.

Among the companies likely to be downgraded is OAO Rosneft as its “standalone credit profile isn’t high,” Griaznov said. It’s net debt stood at $45 billion at end of the third quarter, while free cash flow was $11.4 billion and net debt to Ebitda ratio at 1.55.

(Corrects translation error in quotation in last paragraph of story first published Jan. 27)
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