Debt portfolio management & credit ratings

In order to finance its activities, Gazprom Neft relies upon both its own funding sources, such as revenue from its operations, and borrowings. By setting a target debt-to-equity ratio for its capital structure, the Company seeks to attain an optimal balance between the total cost of capital on the one hand, and the Company’s assured long-term financial stability on the other.

Basic principles of debt portfolio management

The Company follows a conservative debt financing policy. One of the main principles of this policy is to ensure a strong financial position, which is indicated, inter alia, by maintaining the Net Debt/EBITDA ratio calculated for the entire Gazprom Neft Group. The Company makes every effort to ensure that the ratio is maintained at a level no higher than 1.5. During the reporting period, the Company’s Net Debt / EBITDA ratio remained much lower than the threshold. As of 31 December 2012 it was 0.51; and as of 31 December 2013 it was 0.59, according to IFRS consolidated statements.

An important principle in attracting debt financing is to optimise the rates and borrowing periods by aligning them to the Company’s financing projects and the situation on the debt markets. For example, the long-term nature of the Company’s investment projects caused the average debt period to increase from 3.81 years as of 31 December 2012, to 5.15 years as of 31 December 2013. In the meantime, a careful selection of financing instruments (including rate type, investors, and debt currency) and the timing of market access, allowed the weighted average interest rate to remain at almost the same level – 3.48% as of 31 December 2012 and 3.68% as of 31 December 2013. The proportion of short-term borrowing to total debt decreased considerably In accordance with the Group’s Management Discussion and Analysis for the three months ending 31 December and 30 September 2013, and for the years ending on 31 December 2013 and 2012.from 31.7% as of 31 December 2012 to 16.7% as of 31 December 2013.

Debt/EBITDA and Net debt/EBITDA performance

Item

2010

2011

2012

2013

NET DEBT / EBITDA RATIO

0.86

0.71

0.51

0.59

Net debt/EBITDA Limit

1.50

1.50

1.50

1.50

Debt/EBITDA

1.06

0.82

0.80

0.99

Debt/EBITDA Limit

3.00

3.00

3.00

3.00

Source: Company data

Gazprom Neft Group’s debt repayment schedule, RUB million

Item

Under 1 year

6-12 months

1–2 years

2–5 years

5 years +

Bank loans

9,014

23,556

27,158

38,833

5,778

Local bonds

921

2,476

14,483

55,646

Loan participation notes

848

1,067

4,921

49,557

121,346

Other borrowings

17,706

2,114

1,098

444

1,276

Total

28,489

29,213

47,660

144,480

128,400

Source: Company data

Debt portfolio structure by maturity, RUB million

2010

2011

2012

2013

Short-term loans and borrowings, and current part of long-term loans and borrowings.Short-term loans and borrowings

52,860

44,330

77,193

52,413

Long-term loans and borrowings

149,424

176,979

166,447

261,455

Total

202,284

221,309

243,640

313,868

Share of short-term loans and borrowings

26.13%

20.03%

31.68%

16.7%

Share of long-term loans and borrowings

73.87%

79.97%

68.32%

83.3%

Source: Company data

Alongside rate and maturity, further optimisation of the Company’s debt portfolio is achieved through a structural diversification of instruments and investors, as this reduces the Company’s dependence on volatility in the debt capital markets. Currently, OJSC Gazprom Neft’s credit portfolio includes debt financing tools, such as pre-export financing, guarantees of the Export Credit Agency (ECA), syndicated credits, local bonds and Eurobonds.

In 2013, Gazprom Neft continued to adhere to the principle of diversified sources of financing:

  • In April 2013, the Company signed an agreement with an international banking group to obtain a syndicated loan of USD 1 billion.

    This loan structure, combining non-revolving (USD 700 million) and revolving (USD 300 million) credit lines in the same agreement, was unique for the Russian market when the loan was made. The use of a revolving credit line as a financing tool gives extra flexibility to the Company’s debt policy and raises liquidity control efficiency, which has been met with favorable responses from rating agencies.

  • In April 2013 the Company placed its first Eurobond issue for EUR 750 million maturing in 2018 with a 2.933% per annum coupon.
  • In May 2013, the Company mobilised EUR 258 million under an agreement to take a loan secured by the ECA.

    In 2013, the transaction of ECA-secured loan won two awards:

    • Deal of the Year” by Trade Finance magazine, specialising in commercial and export financing and owned by EUROMONEY, one of the most authoritative publishing groups in the world in financing and capital markets;
    • “Best Deal of 2012” by Global Trade Review, one of the leading global magazines in international trade financing.
  • In November 2013, the Company placed an issue of Eurobonds for USD 1,500 million maturing in 2023 and with a 6.0% per annum coupon.
  • In November 2013, an agreement was signed with an international banking group to raise a club loan for USD 2,150 million.

    The second club loan in 2013 was the largest taken by the Company since 2007, and its flexible access and repayment schedule will help the Company to optimise its borrowing policy.

    Owing to a favourable market situation existing at the time of the loan and considerable interest on the part of major financial institutions, the agreement recorded the lowest interest rate for 5-year loans afforded to Russian oil-and-gas sector companies in 2013 (LIBOR + 1.50% per annum).

Following the implementation of its debt policy, Gazprom Neft Group’s debt portfolio was RUB 313.9 billion as of 31 December 2013, or RUB 70.3 billion higher than as of 31 December 2012 (RUB 243.6 billion).

One of the fundamental principles of the Company’s debt policy is also to maintain a high level of information transparency by disclosing the results of Gazprom Neft Group’s portfolio management on the official corporate website. In 2013, the respective section of the corporate website was completely redesigned and updated: http://ir.gazprom-neft.com/debt-relations/debt-profile/.

Funds borrowed in 2013 were used for general corporate purposes.

Compliance with main loan contract covenants

According to the loan contracts made by the Company, the consolidated loan debt to consolidated EBITDA ratio shall not exceed 3. The Company’s loan contract compliance monitoring and enforcement system shows that, during the reporting period and as of 31 December 2013, the Company fully complied with all such requirements, as well as other obligations under loan contracts.

Possible debt financing tools in 2014

Depending on the Company’s requirements for debt financing, the following financing tools can be used in 2014:

  • Rouble bonds,
  • Eurobonds
  • Bilateral loans,
  • Syndicated credits,
  • ECA financing,
  • Other external financing sources.

On 21 February 2013, in order to facilitate (if required) prompt debt financing for OJSC Gazprom Neft, the Company’s Board of Directors approved a prospectus and a resolution for seven rouble bond issues of 17–23 series worth a total of RUB 55 billion, and adopted resolutions on their placement. The prospectus remained in effect until 9 April 2014.

At the current time, the Company’s Board is going to consider the proposed changes to the prospectus and a decision to issue exchange bonds (XB) as a measure to bring the documents in compliance with the effective federal legal regulation on the securities market. The XB prospectus is permanent, allowing the Company to make quick arrangements for future XB issues should the need arise.

Credit ratings

OJSC Gazprom Neft has been assigned credit ratings by three international credit agencies: Standard & Poor’s (S&P), Moody’s and Fitch.

In October 2013, Gazprom Neft was assigned the credit rating BBB (stable outlook) by Fitch Ratings for the first time. In November 2013, Moody’s raised the Company’s credit rating by another step to Baa2 (stable outlook). Gazprom Neft’s stable financial performance also triggered S&P to review its 2014 outlook, changing it from stable to positive, while the credit rating was confirmed at “BBB-”.

The Company’s credit ratings are investment level ratings and approximate the country (sovereign) ratings assigned by these rating agencies to the Russian Federation.

The investment level ratings assigned to OJSC Gazprom Neft contribute to maintaining and expanding the potential for debt financing and reducing the Company’s borrowing costs.

Gazprom Neft credit ratings

Agency

Scale

Rating

Outlook

Standard&Poor’s

International scale, foreign currency

ВВВ-

Stable

International scale, national currency

ВВВ-

Stable

National scale (Russia)

ruAAA

Stable

Moody’s

International scale, foreign currency

Baa2

Stable

Fitch

Long-term foreign and local currency issuer default rating

ВВВ

Stable

Source: Rating agencies data