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Rating Action: Moody's affirms PKN ORLEN's Baa2 rating, changes outlook to positive from negative
Global Credit Research - 16 Jul 2020
Frankfurt am Main, July 16, 2020 -- Moody's Investors Service, ("Moody's") has today affirmed the issuer rating of Polski Koncern Naftowy ORLEN S.A. ("PKN ORLEN" or "company") at Baa2 and also affirmed the baseline credit assessment (BCA) at baa3. Concurrently, Moody's has also affirmed at Baa2 the rating of the EUR 500 million due 2021 and EUR 750 million due 2023 senior unsecured bonds issued by ORLEN Capital AB (publ) and guaranteed by PKN ORLEN.
The outlook on all ratings has been changed to positive from negative.
"Today's outlook change reflects the company signing a letter of intent with the Polish State Treasury to take over its 71.88% share in Poland's dominant natural gas company Polskie Gornictwo Naftowe I Gazownictwo S.A. (PGNIG, Baa2 stable) and the agreement with the European Commission on remedies to achieve regulatory approval for the takeover of Poland's second largest refining company Grupa Lotos. This will increase PKN ORLEN's business diversification and stability of cash flows, while the intention to finance the transactions mainly by equity will limit the company's leverage at a conservative 2.0x -2.5x adj. debt to EBITDA.", says Janko Lukac, an AVP -- Analyst and Moody's lead analyst for PKN ORLEN.
The outlook on PKN ORLEN's rating has been changed to positive from negative to reflect its importance for the Energy agenda of the Polish Government and the commitment to retain a relatively conservative balance sheet. A conservative balance sheet is necessary in order to retain flexibility for substantial capex investments in its petrochemical operations and plans to increase its exposure to gas power generation, the maintenance of electricity and gas distribution grids and renewables.
Furthermore, these transactions including the May 2020 takeover of the fourth largest utility and electricity grid operator Energa SA (Baa2 negative) prove PKN ORLEN's mandate to consolidate the Polish energy sector on behalf of the Polish government. Hence, in Moody's view, a successful closure of the transaction is highly likely, subject to an antirust approval by the European Commission. These transactions, once concluded, will lead to a strongly improved diversification and size, and therefore, are positive for the rating of PKN ORLEN.
The rating also reflects (1) PKN ORLEN's strong presence in Central and Eastern Europe (CEE), with a dominant presence in the downstream segment; (2) the smaller scale of its upstream operations; (3) the above-average complexity of its refineries, which are able to process heavy crude oil; (4) the high level of integration among its refining, retail and petrochemical businesses; (5) its leading presence in the Polish wholesale and retail fuel markets and (6) the relatively stable cash flows from its 80% stake in Energa S.A.
However, PKN ORLEN, without the announced transactions, remains exposed to the volatility of refining margins. This is only partly mitigated by the stabilizing effect on its operating results from its retail division, its electricity generation capacity and distribution network and the company's efforts to invest heavily in the construction of new petrochemical facilities to increase its margins and resilience. The acquisitions will increase significantly the size (from an EBITDA of about PLN9 billion in 2019 towards PLN20 billion pro forma year 2019 for the envisaged acquisitions), diversification and resilience of the group's operations.
During the next 12-18 months Moody's will monitor the closure of the envisaged transactions, potential further M&A activity as well as investment plans and its impact on the group's leverage which Moody's estimated to not exceed 2.0x -- 2.5x adj. debt/EBITDA, which would position PKN ORLEN's very strongly in the baa3 BCA considering its enlarged size.
PKN ORLEN aims to close both transactions during the first half of 2021 subject to regulatory approval for PGNIG and meeting the remedies expectations of the European Commission. Both, PGNIG and Grupa Lotos S.A. are currently majority owned by the Government of Poland (A2 stable) by 71.88% and 53.2%, respectively.
With 27.5% of its share capital held by the Polish state, PKN ORLEN falls within the scope of Moody's rating methodology for Government-Related Issuers (GRIs). Under this methodology, Moody's assumes moderate dependence and moderate support from the Government of Poland (A2 stable). This reflects PKN ORLEN's strategic importance to the Polish state as a market leader in the petroleum retail sector, its contribution to GDP, and its status as a major employer within Poland. Hence, PKN ORLEN's Baa2 rating benefits from a one-notch uplift relative to the baa3 BCA. Following the closure of the transactions Moody's will revisit the dependence and support from the Government of Poland given the central role PKN will play in future for the country's energy policy and expects the transaction to result in the Polish State to increase its share of share capital of PKN meaningfully.
Moody's deems PKN ORLEN's liquidity as adequate. The group has PLN 4.015 million cash on its balance by the end of Q1 2020 and access to an undrawn PLN 4,522 million multicurrency revolving facility maturing in April 2021, which is more than sufficient to cover working capital swings and in combination with operational cash flows to fund the CAPEX program. However, the agency expects a timely refinancing of the revolving credit facility coming due in April 2021 and notes that PKN envisages to finance the acquisition of PGNIG and Grupa Lotos mainly by equity and to limit cash payments to existing shareholders to a minimum.
The outlook on PKN ORLEN's rating is positive, reflecting the strategic importance of PKN for the Polish Government in combination with the positive impact of size, business diversification and financial strength stemming from the announced acquisitions, if successfully concluded. At the same time Moody's expects PKN ORLEN being able to manage to withstand pressures from a decline in refining margins as a result of lower demand driven by the lockdowns caused by Covid 19.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's will consider to upgrade PKN ORLEN's Baa2 following the successful takeover of PGNIG and Grupa Lotos if the transaction would result in (1) PKN ORLEN successfully increasing the resilience of its business profile in combination with a better geographical diversification, (2) maintain its leverage at below 2.0x adjusted debt/EBITDA on a sustained basis, and (3) continues to show positive free cash flow (FCF) generation, combined with strong liquidity.
The Baa2 rating could be strained if the transaction would not be closed and at the same time adverse downstream conditions result in markedly weaker operating performance, or if leveraging related to its growth strategy hurts the company's credit metrics, resulting in adjusted debt/EBITDA exceeding 2.5x on a sustained basis. Negative FCF generation or pressure on PKN ORLEN's liquidity could result in a downgrade. Reduced support assumptions from the Polish government could also result in a downgrade.
The methodologies used in these ratings were Refining and Marketing Industry published in November 2016 and available at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1040610, and Government-Related Issuers Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.
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 ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are 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.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
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Janko Lukac Asst Vice President - Analyst Corporate Finance Group Moody's Deutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Matthias Hellstern MD - Corporate Finance Corporate Finance Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's Deutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454
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