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Rouble devaluation positive for some, neutral for others

12 March, 2014

The effects on the credit profiles of Moody's rated Russian corporates would be positive to neutral under the scenario of a sustained 10% drop in the rouble to around RUB 36.5 per US dollar from RUB 33.2 at the start of 2014, Moody's Investors Service said in a special comment on Wednesday.
The rating agency has considered the likely implications of the this scenario to demonstrate the rated companies' exposure to currency depreciation in isolation from other factors. This consideration comes against the backdrop of a weakening of the rouble on March 3 to RUB 36.4 against the US dollar, when tensions between Russia and Ukraine escalated, exacerbating months of pressure on the currency.
"The creditworthiness of chemical companies would benefit the most from a weaker rouble, as at least 50% of their revenues are in US dollars, while their cost bases are mainly in roubles," said Denis Perevezentsev, a Moody's senior analyst. "The majority of steel and mining companies would gain moderately, while the effect on the oil and gas sector would be neutral. Most rated issuers in other sectors have limited exposure," he continued.
Moody's noted that there is a risk that the rouble may fall further given the growing geo-political uncertainties. However, the Central Bank of Russia (CBR) has raised its key interest rate by 150 basis points to 7% from 5.5% and increased interventions on the foreign exchange market, which limits downside risks for the rouble. Subsequent Moody's reports on Russian corporates will take into account the credit implications of a possible step-up in inflation, a weaker macroeconomic environment or challenges in accessing the financial and debt capital markets as a result of the evolving developments regarding Ukraine, such as from the potential imposition of economic sanctions by the US and European Union.
The rating agency anticipates that the credit positive effect from a weaker rouble would be greater for fertiliser companies within the chemicals sector, such as Acron, PhosAgro and Uralkali, than for petrochemical companies Nizhnekamskneftekhim's (NKNK) and Sibur Holding, as a lower proportion of their debt and capital expenditure (capex) is in US dollars.
Moody's expects that coking coal mining companies, such as Mechel and Raspadskaya would experience the greatest positive effect on EBITDA (+30%-40%), albeit from a low base, as they are currently generating only thin margins over their production costs, owing to weak coking coal prices. This is because the cost bases of these companies in roubles would decrease relative to their revenue streams, as domestic prices for coking coal in roubles are indirectly linked to the international benchmark price, which is set in US dollars.
A weaker rouble would be credit positive for rated steel and mining companies and increase their EBITDA by around 10%-15% with the exception of TMK and Magnitogorsk Iron & Steel Works (MMK), which would experience a less material credit impact as the proportion of their revenues denominated in roubles broadly matches their expenses denominated in roubles.
Moody's projects that companies with a higher proportion of export sales, rouble operating costs, and rouble-denominated debt, would be better positioned to withstand a depreciation. Although most oil and gas producers have a high proportion of foreign currency debt, their dollar-denominated revenues would provide a natural hedge, with Rosneft being cushioned more than Gazprom, Gazprom Neft and Novatek. Conversely, Bashneft's leverage would improve because it generates 60% of its revenues from exports, while less than 10% of its debt is in foreign currency.
In addition, Moody's noted that most freight rail transportation companies' revenues, operating and capital expenses are mainly in roubles, while their debt is either in roubles or hedged against rouble depreciation. Brunswick Rail Limited and ISR Trans LLC are more vulnerable because they have a higher proportion of foreign currency borrowing.
In the mobile sector, Vimpel-Com Holdings B.V. has a higher exposure to a weaker rouble than MegaFon and Mobile TeleSystems (MTS) because of its greater proportion of foreign-currency debt. The exposure of retailers Lenta Limited and X5 Retail Group N.V. would be limited to import purchases, which Moody's think they could largely mitigate by passing on the costs to their suppliers and/or end-consumers, and a possible reduction in domestic demand.