Standard&Poor's has announced a lowering of its long-term credit rating for the oil giant YUKOS from BB- to ???

Wednesday, March 3, 2021

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Standard&Poor's has announced a lowering of its long-term credit rating for the oil giant YUKOS from BB- to ???. The rating drop, made Tuesday, followed a Moscow court's decision barring the company from any action with respect to its property except for property directly related to the production of oil. The ban was announced as a way of assuring payment of a tax bill of USD 3.5 billion. YUKOS has announced that it will challenge the bill in court. Meanwhile, the company's negative-outlook classification on S&P's Credit Watch list has been changed to a 'developing' outlook. YUKOS's rating on the Russian national scale has been lowered from ruAA- to ruB. Standard&Poor's also lowered the long-term credit rating of Russian oil company Sibneft from ?+ to ? in the wake of court action barring it from any activity with respect to shares of YUKOS, which formally holds 92% of Sibneft stock. The former remains on the Credit Watch list, with a 'developing' marking. It has been on the list as such since October 31, 2003. Sibneft's rating on the Russian scale has been dropped from ruAA- to ruA-. 'The lowered rating of YUKOS and the possibility of further lowering, in view of its pessimistic 'developing' classification, reflect Standard&Poor's caution about an increased risk of YUKOS losing ownership of its basic assets, which provide it with cash flow, and about increased uncertainty about liquidity,' Elena Anankina, a Standard&Poor's analyst, said. 'The rating decision also reflects the increase of political pressure on the company, which may weaken the company's position in the judicial consideration of the tax case [a court is expected to review the matter in May].' In a worst-case scenario, YUKOS (if it loses the tax case) might be faced with the need quickly to sell basis productive assets, with the start of bankruptcy proceedings or with an essential nationalization of its assets, the analyst said. 'The lowered rating for Sibneft and its place on the Credit Watch list reflects increased uncertainty about the undoing of the deal for the acquisition of Sibneft by YUKOS and, thus, about the shareholder structure and financial policies of Sibneft," Anankina said. 'The ratings decision also reflects the risk that increased pressure on YUKOS may have negative effects on Sibneft.' In addition, a negative effect on the rating of Sibneft is also seen in the company's aggressive style of management (for example, its opportunistic attempts to take advantage of Russian institutional weaknesses to overturn its acquisition by YUKOS by legal and regulatory pressure) as well as its aggressive financial policy. Illustrative of the latter were the size of dividends paid in 2001, 2002 and 2003 and its active use of risky schemes of tax optimization. On the other hand, its high operational indexes (increase of extractions from existing fields up 19.4% in 2003, and its profitability for the first half of 2003 was 32% by EBITDA) makes possible a higher rating than the current ?, if the questions about its financial policy, assets and management style are resolved, Anankina said. YUKOS in practical terms no longer controls Sibneft, as a series of unsuccessful attempts to elect its representatives to the Sibneft board show. Thus, YUKOS' rating affects the rating of Sibneft but doesn't constitute a formal 'ceiling,' Anankina said.