Standard & Poor’s Ratings Services revised the outlook on Georgian Oil and Gas Corporation to negative from stable. We affirmed the ‘B+/B’ long- and short-term corporate credit ratings.
The outlook revision primarily reflects the revision of the agency’s base-case scenario for GOGC.
“S&P understands the company is now contemplating increasing its investments in 2016-2017,” the statement said. “Having successfully completed construction of the Gardabani thermal power plant in late 2015, GOGC is currently considering investing into an extension of this project, estimated at $200 million-$250 million, and constructing an underground gas storage facility worth another $250 million.”
This will require increase in debt financing and means that the company might be able to deleverage only if both projects are successfully launched, which will not happen before 2018.”
GOGC’s financial risk profile is constrained by relatively high leverage, the agency’s assumption of high volatility of cash flows and ratios during stress periods, and sizable investments required to finance its growth projects, the statement said.
“The company also issued a loan of Georgian lari (GEL) 47 million to its sister state-controlled entity in 2012 and had GEL17 million of cash deposits pledged as collateral for a loan obtained by another GRE,” the statement said. “Although the loan is interest-bearing and we assume it will be repaid to GOGC and that the pledged cash will be released by 2017, these transactions heighten the risk that GOGC’s funds might be used to finance the activities of other Georgian GREs.”
The constraining factors also include the company’s lack of long-term strategic planning and a history of unexpected changes in the government’s strategic decisions for GOGC. For example, the company abandoned plans to construct the Namakhvani hydropower plant in favor of the Gardabani gas-fired CCPP in 2013. Furthermore, on June 12, 2015, the company announced a potential sale of the Gardabani CCPP to the Georgian government; however, the agency understands that this has now been cancelled.
S&P assesses GOGC’s liquidity as adequate. As of Dec. 31, 2015, we estimate GOGC’s ratio of liquidity sources to uses for the next 12 months comfortably exceeded 1.2x. The agency’s assessment takes into account that the $250 million bond is due May 2017, and that the company needs to refinance it within the next few months to maintain the adequate assessment.
Principal liquidity sources:
• Around GEL191 million of available cash and liquid instruments.
• Cash generated from operations of about GEL170 million.
• Working capital inflows of around GEL50 million.
Principal liquidity uses:
• Maintenance capital expenditures of about GEL72 million.
• Dividends of GEL15 million.
• GOGC has to comply with maintenance covenants, the strictest of which is net debt to EBITDA of 3.5x. The agency believes GOGC has adequate covenant headroom due to meaningful cash on the balance sheet.
The negative outlook reflects the risk that we could lower the rating if GOGS’s leverage exceeds our expectations of debt/EBITDA consistently below 4x.
S&P understands that the company is quite likely to proceed with its two large investment projects–the second phase of Gardabani and an underground gas storage facility–which could increase leverage to above this threshold if financed solely with debt.
However, we also understand that these projects are subject to availability of financing and a certain share could be financed with equity or project-finance at the project level with no recourse to GOGC. Therefore GOGC’s leverage in 2016-2018 will ultimately depend on the type of financing chosen.
S&P assumes 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.
S&P could revisit assessment of the GRE’s status if the company were to proceed with both of its investment projects without any government support. The agency also assume that GOGC will not provide any more loans to other GREs at the expense of its own financial profile.
S&P could revise the outlook to stable if the company’s leeway in ratios levels increased. That might happen if the company refrained from new large investment projects or if it obtained meaningful equity financing for some of them.
Under S&P’s criteria, the agency would need to revise GOGC’s SACP at least to ‘bb-‘ to then upgrade the company, provided that the sovereign rating remained ‘BB-‘ and the likelihood of support remains very high.
If debt/EBITDA approached close to 2x we could consider an upgrade. A positive rating action on the sovereign would also likely lead to a similar action on GOGC, all else being equal.