The credit rating of Tatneftechim LLC (hereinafter, Tatneftechim, the Company) reflects low assessment of the risk profile of the wholesale trade industry, to which the Company belongs. However, the Company has its own diesel fuel production assets and infrastructure, which is positive for its positions. Small business size, low corporate governance score and very low free cash flow (FCF) are the main constraints on the rating. At the same time, low leverage, medium coverage, and medium business profile of the Company have a positive effect on the rating.
Tatneftechim is a trading and production company, which size is small by the standards of the Russian corporate sector, specializing in the wholesale of fuels and lubricants and production of class K5 diesel fuel. The sales volume in 2020 amounted to 78 thousand tons. has its own oil depot with a tank farm for a total volume exceeding 22,000 m3, a berthing facility designed to unload vessels, process pipelines linked to the main oil product pipelines of PJSC Transneft, as well as internal and external railway tracks and overpasses, with the capacity for simultaneous unloading and loading up to 12 railway tank cars, as well as an automatic loading system for five vehicles, which has a positive effect on the rating. The company has a representative office at SPIMEX. The main shareholder of the Company is M. M. Islamov.
The very low FCF is primarily associated with the Company's efforts to develop its own production base, which required additional investments in the working capital. At the end of 2020, the Company's own production generated about 15% of revenue. The Agency expects a substantial growth in the share of own production in the Company's revenues in 2021.
Key rating assessment factors
The Company's size is small, which is evidenced by the very low weighted FFO before net interest payments and taxes for the period of 2018–2023 (about RUB 190). Against the background of the development of its own production, the Company's profitability increased significantly in 2020, the return on FFO before interest payments and taxes amounted to 6.92 against 2.29% at the end of 2019. Thus, further development of own production can have a positive impact on the profitability and assessment of the size of the Company. The very low value of FCF margin is primarily associated with investments in working capital associated with the development of own production; By the end of 2020, FCF margin was -1.6%, and ACRA expects FCF to grow gradually to a positive value by 2022, after a peak of capital expenses was passed in 2020, following which the Company managed to increase its diesel fuel production capacity to 25,000 tons per month.
The low corporate governance assessment is due to the low assessment of the group structure caused by the distribution of the Company's operating activities within subsidiaries and the availability of intra-group loans, although the Agency notes the economic feasibility of such operations. ACRA also notes the low assessment of financial transparency, which is primarily related to the lack of consolidated IFRS financial statements. In addition, the Agency draws attention to the absence of key management bodies, such as board of directors, as well as board committees, policies and formalized procedures for making management decisions, which limits the rating of the Company. At the same time, ACRA takes into account the fact that the presence of all attributes and compliance with high corporate governance standards is not always advisable for companies at this stage of development. ACRA is neutral in its assessment of Tatneftechim's development strategy in connection with the consistent development of the Company's operation, including the successful development of its own production.
Risk management is assessed by the Agency at a medium level. The Company has procedures in place to reduce financial and reputational risks associated with counterparties.
The medium business profile assessment takes into account the low cyclicality of the Company's key sales market — wholesale market of fuels and lubricants. The business profile assessment reflects the fact that the Company has its own production assets of emission class K5 diesel fuel, as well as the presence of its own infrastructure, which is positive for the Company's profitability and will contribute to the potential growth of revenue and FFO in the future. It is also worth noting the Company's diversified client base and moderate credit quality of counterparties.
Medium liquidity assessment. The Company's first bond issue (RU000A102BD2) is due in the fall of 2021. The Company has no plans to use the proceeds from the second issue to redeem the first one; instead, they will be used to finance purchases of crude oil for its own production, procurement needs, and purchases at SPIMEX. As the main source of liquidity, the Company sees the planned utilization of funds out of working capital, taking into account the projected contract expiration dates and, in general, a short turnover period. Currently, the Company may rely on the committed credit lines for about RUB 30 mln, and by September 2021, according to the Company's repayment plan, their amount may increase to RUB 90 mln. There is also the possibility of attracting additional bank financing, which can be secured by the Company's assets. In accordance with ACRA's approaches, such a liquidity management policy cannot be considered conservative, which negatively affects the rating. The Agency will monitor the liquidity status of the Company until the first issue is fully redeemed.
Low leverage and medium coverage. In November 2020, the Company placed its debut bond issue for RUB 200 due in 2021. Prior to this, the Company's loan portfolio consisted of bank loans used to finance working capital. Tatneftechim plans to place bonds for RUB 300 mln in 2021 to increase the Company's working capital, which may be decreased subsequently to redeem the first bond issue (RU000A102BD2) for RUB 200 mln; eventually, this is expected to allow the Company to increase its working capital by RUB 100 mln, excluding the accumulated profit. ACRA expects that by the end of 2021, the ratio of long-term debt to FFO before fixed charges will be 1.4x. Leverage indicators are medium. The ratio of FFO to net interest payments to interest payments in 2020 was 2.7x, and the Agency does not expect this indicator to decrease in 2021.
Key assumptions
- Implementation of the Company's plans to expand its own diesel fuel production in 2021–2023;
- Investments in working capital in accordance with the approved business plan;
- Average return on FFO before interest payments and taxes not less than 5% in the forecast period;
- No significant annual dividend payments in the forecast period;
- Placement of the second bond issue in 2021 for RUB 300 mln.
Outlook or rating change factors
The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
- Increase in the volume of committed credit lines and better the Company's position in liquidity and FCF margin;
- Significant improvement in the corporate governance practices.
A negative rating action may be prompted by:
- Insufficient funds on the Company's accounts to redeem the first bond issue (RU000A102BD2);
- Higher leverage.
Rating components
Standalone creditworthiness assessment (SCA): bb-.
Adjustments: none.
Issue ratings
No outstanding issues have been rated.
Regulatory disclosure
The credit rating has been assigned to Tatneftechim LLC under the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Non-Financial Corporations under the National Scale for the Russian Federation and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities.
A credit rating has been assigned to Tatneftechim LLC for the first time. The credit rating and its outlook are expected to be revised within one year following the publication date of this press release.
The credit rating was assigned based on data provided by Tatneftechim LLC, information from publicly available sources, and ACRA’s own databases. The credit ana;ysis was conducted using the RAS financial statements of Tatneftechim LLC. The credit rating is solicited, and Tatneftechim LLC participated in its assignment.
In assigning the credit rating, ACRA used only information, the quality and reliability of which was, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.
ACRA provided no additional services to Tatneftechim LLC. No conflicts of interest were discovered in the course of credit rating assignment.
