The affirmation of the credit rating of Tatneftekhim LLC (hereinafter, the Company, or Tatneftekhim) is a consequence of maintaining credit metrics within the range established for this rating level. The change in the credit rating outlook from Stable to Positive reflects the current growth dynamics of the Company’s revenue, which grew by more than 75% in 2021 compared to 2020, against the backdrop of maintaining the medium profitability, as well as the Agency’s expectations regarding future financial metrics of the Company.
The credit rating of Tatneftekhim is due to the low assessment of the industry risk profile, which is determined by the high volatility of the wholesale trade industry to which the Company belongs. The Company's medium liquidity, small business size and very low free cash flow (FCF) are the main rating constraining factors.
Tatneftechim is a trading company, which size is small by the standards of the Russian corporate sector, specializing in the wholesale of fuels and lubricants. The Company's sales volume in 2021 amounted to 114,000 tons.
Key assessment factors
The medium business profile assessment takes into account the low cyclicality of the key sales market for the Company, the wholesale market of fuels and lubricants. The business profile score reflects the fact that the Company has its own production facilities for class K5 diesel fuel. The share of diesel fuel produced by the Company in 2021 was 28.5% of its revenue. The availability of its own infrastructure also has a positive impact on the Company's profitability and will contribute to the potential growth of the Company's revenue and FFO in the future. The Agency notes the diversified client base of the Company and the moderate credit quality of its counterparties.
The Company's size is small, which is evidenced by the very low weighted FFO before net interest and taxes for the period of 2019–2024 (about RUB 336 mln). Thanks to the growth in revenue in 2021 to RUB 4.8 bln (+75% compared to RUB 2.7 bln in 2020), the Company managed to maintain its FFO before net interest margin. The Agency notes that the Company's diesel fuel processing plants are currently not fully loaded, therefore, there is a prospect of further growth in the share of own products in revenue, which may have a positive impact on profitability in the future.
Low leverage; medium coverage of interest payments. In 2021, the Company successfully redeemed its debut bond issue for the amount of RUB 200 mln. Currently, the Company's loan portfolio includes a bank credit facility and bond issues. The public debt of the Company is represented by two bond issues for RUB 300 mln each due in 2023 (option for the RU000A103UL3 issue) and in 2024 (the RU000A103B05 issue). ACRA notes that at the end of 2021, the ratio of long-term debt to FFO before fixed charges was 1.8x, and the ratio of short-term debt to revenue was 0.1x. Debt service indicators are at the medium level. The ratio of FFO before net interest to interest in 2021 was 3.2x, and the Agency does not expect this ratio to decline in 2022.
The low corporate governance assessment is conditioned by the low score for the group structure caused by the allocation of the Company's operating activities within subsidiaries. ACRA also notes the low score for financial transparency, which is related to the lack of consolidated IFRS financial statements. In addition, the Agency draws attention to the absence of key management bodies like board of directors, as well as board committees, policies and formalized decision-making procedures, 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 operations, including the successful development of its own production and sale scaling. The risk management function is assessed by the Agency as medium. The Company has procedures in place to reduce financial and reputational risks associated with counterparties.
Medium liquidity assessment. Tatneftekhim uses working capital as one of the main instruments for liquidity management. The Company is doing some work to improve liquidity management practices, but the Agency does not consider these practices to be conservative at the moment. The amount of committed credit lines is currently around RUB 80 mln, but the Company is negotiating with banks, trying to expand its credit lines in the near future. The Agency will closely monitor the Company's liquidity position in 2022.
Medium profitability; very low free cash flow score. At the end of 2021, the Company's FFO before net interest margin amounted to 6.9%, which is comparable to the level seen in 2020. The very low cash flow is due to Tatneftekhim's investments in working capital against the backdrop of a sharp increase in revenue. In 2021, the FCF was negative, but the Agency believes that by the end of 2022, the FCF will be able to enter the positive zone.
Implementation of the Company’s plan for revenue and operating cash flow for the period 2022–2024.
The Company developing in accordance with its strategy.
Further development of the Company's own diesel fuel production.
Potential outlook or rating change factors
The Positive outlook assumes that the rating will highly likely be upgraded within the 12 to 18-month horizon.
A positive rating action may be prompted by:
Increase in committed credit lines and better liquidity position of the Company;
Better corporate governance practices.
A negative rating action may be prompted by:
Increase in the ratio of long-term debt to FFO before fixed charges above 2.0x;
Decrease in the ratio of FFO before net interest to interest below 2.5x.
Standalone Creditworthiness Assessment (SCA): bb-.
No outstanding issues have been rated.
The credit ratings have been assigned 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.
The credit rating of Tatneftekhim LLC was published by ACRA for the first time on June 21, 2021. The credit rating of Tatneftekhim LLC 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 Tatneftekhim LLC, information from publicly available sources, and ACRA’s own databases. The credit rating was assigned based on the RAS financial statements of Tatneftekhim LLC. The credit rating is solicited, and Tatneftekhim 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 ancillary services to Tatneftekhim LLC. No conflicts of interest were identified in the course of credit rating assignment.