Rating Action: Moody's assigns Ba3 rating to Borets' proposed notes
Global Credit Research - 03 Sep 2020
London, 03 September 2020 -- Moody's Investors Service ("Moody's") had today assigned a Ba3 rating to Borets International Ltd's (Borets) proposed 6-year senior unsecured US dollar-denominated notes to be issued by Borets Finance DAC, a wholly owned subsidiary of Borets incorporated under the laws of Ireland, and guaranteed by the parent company and some of its principal subsidiaries.
The company intends to use the net proceeds from the proposed senior unsecured notes to repay outstanding borrowings under its existing senior unsecured notes due in 2022 and some bank credit facilities as well as for general corporate purposes.
The proposed notes will be issued by Borets Finance DAC, a financing vehicle established solely for the purposes of notes issuance, and guaranteed by Borets International and its principal operating subsidiaries, which provided more than 80% of the group's reported EBITDA in the 12 months ended 30 June 2020. The notes will be general unsecured and unsubordinated obligations of Borets, ranking pari passu with all of its other unsecured and unsubordinated indebtedness. Moody's rates the notes at the same level as Borets' corporate family rating (CFR), because the company has no debt obligations in its capital structure more senior to the notes.
Borets' credit quality is supported by (1) the company's leading position in the niche electric submersible pumps (ESPs) market, which is a type of artificial lift system used in the oil industry; (2) its developing international business, which provides revenue diversification; (3) its relatively resilient rental business; (4) the greater resilience of the Russian oilfield services market, compared with international markets; and (5) the company's adherence to sound corporate governance standards and its balanced financial policy.
However, the rating is constrained by (1) Borets' modest scale by global standards; (2) its focus on a single product line; (3) its considerable geographical and customer concentration; (4) the deterioration in its operating and financial performance in 2019; and (5) some currency mismatch between the company's mostly Russian-rouble-denominated revenue and largely US dollar-denominated debt. The rating also reflects Moody's expectation that Borets' operating performance and credit metrics will be under pressure in 2020-21 amid the market downturn in the global oilfield services industry before some revival in 2022.
Governance considerations include Borets' concentrated private ownership structure, which creates a risk of rapid changes in the company's strategy and development plans, revisions to its financial policy and an increase in shareholder payouts that could weaken the company's credit quality. However, the owners' track record of a fairly prudent approach towards the company's financial policies, relatively developed corporate governance procedures for a private company and its seven-member board of directors, with three independent directors, partly mitigate the risks related to corporate governance and potential excessive shareholder distributions.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Given the negative rating outlook and the company's scale of operations and business profile, an upgrade of Borets' rating is unlikely. Moody's could change the outlook to stable if the company were to reduce its Moody's-adjusted debt/EBITDA below 3.5x on a sustainable basis, market conditions were to stabilise and start to improve, and the refinancing risk is timely resolved.
Moody's could downgrade Borets' rating if its (1) operating performance, cash generation or market position were to weaken significantly, (2) Moody's-adjusted debt/EBITDA were to rise above 4.0x on a sustained basis, or (3) liquidity were to deteriorate.
The principal methodology used in this rating was Global Oilfield Services Industry Rating Methodology published in May 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1062654. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Borets International Ltd, domiciled in the United Arab Emirates, specialises in the design and manufacturing of ESPs (a type of artificial lift systems for the oil industry) and the provision of related services, including rental of equipment. Borets derives 60%-65% of its revenue from Russia and actively exports its products to the Americas and the Middle East. Borets has 11 manufacturing facilities, predominantly in Russia, and a global service network. The company is controlled by two individuals, who hold around 92% of the company; the remaining 8% is treasury shares. In the 12 months ended 30 June 2020, Borets generated $495 million in sales.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The rating has been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.
This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
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Mikhail Shipilov Asst Vice President - Analyst Corporate Finance Group Moody's Investors Service Limited, Russian Branch 7th floor, Four Winds Plaza 21 1st Tverskaya-Yamskaya St. Moscow 125047 Russia JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Denis Perevezentsev, CFA VP - Senior Credit Officer Corporate Finance Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's Investors Service Ltd. One Canada Square Canary Wharf London E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454
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