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2019 June 5

Master of financial seas

Fitch has recently upgraded the rating of Russian shipping company Sovcomflot (SCF) to 'BB+' with Stable Outlook. The upgrade reflects SCF's improved business profile due to an expansion in industrial business. 

Exception from the rule

International rating agencies hardly ever honored Russian companies with high credit ratings, especially in recent years, primarily referring to so called non-market factors. Nevertheless, Fitch Ratings has recently upgraded Russia-based PAO Sovcomflot's (SCF) Long-Term Issuer Default Rating (IDR) to 'BB+' with Stable Outlook from 'BB'/'Positive'.  Interestingly, only Maersk and Misc Berhard have higher ratings (Moody’s Baa3 and Baa2 accordingly) with Maersk operating in a different segment and not operating tankers while most of carriers have no credit rating as all. It is also quite demonstrative that Sovcomflot has ratings of the world’s three largest agencies while most of other players have only one or two of them. 

For example, Teekay is 5 positions below Sovcomflot (Moody’s B3), Dynagas LNG Partners – six positions below (Moody’s Caa1), International Seaways five positions below (Moody’s B3 and S&P B-), Mitsui OSK Lines – one position below (Moody’s Ba2), Stena AB – three positions below (Moody’s B1 and S&P B+).

The secret of success

“The upgrade reflects SCF's improved business profile due to an expansion in industrial business, which contributed about 57% in total time charter equivalent (TCE) revenue in 2018, up from 34% in 2016”, says Fitch’s statement.

Besides, the agency analysts say the upgrade is also supported by their expectation of funds from operations (FFO) adjusted net leverage moderation to about 5x in 2019 and to about 4.6x on average over 2020-2022 down from a peak of slightly above 7x in 2017. 

According to the statement, the rating also incorporates SCF's large scale of operations, fairly young and specialised fleet, diversified customer base and exposure to market risks through conventional business.

“FFO adjusted net leverage well below 4.3x and FFO fixed-charge cover above 4.0x on a sustained basis may lead to a stronger SCP. However, with the current strength of the parent links SCF's IDR is capped at one notch below that of the Russian Federation unless its SCP is the same or above the government, which we do not expect”, says Fitch. 

Thus, SCF strategy focused on business diversification with an accent on industrial segment pays off and ensures competitive advantages amid unstable spot market as we wrote earlier >>>> 

The company will be additionally supported with the state efforts giving the priority to Russian ships when it comes to transportation of hydrocarbons. According to Leonid Mikhelson, Chairman of NOVATEK Management Board,  LNG production in the Arctic will reach 140 million tonnes by 2035 which ensures great opportunities for Sovcomflot as a national tanker operator and other Russian players. 

Vitaly Chernov