Debt Portfolio Management and Credit Ratings

As far as funding for its activities, Gazprom Neft relies both on internal funding sources generated by income from operating activities as well as borrowed funds. When determining the ratio of debt to internal financing within the capital structure, the Company seeks to achieve an optimal balance between the overall value of capital on the one hand and ensuring long-term sustainable development on the other hand.

Core principles of debt portfolio management

The Company adheres to a rather conservative debt financing policy. One of the key principles of the debt policy is to ensure a high level of financial sustainability for which an important indicator is the “Net Debt/EBITDA” ratio and “Consolidated financial debt/consolidated EBITDA” ratio as calculated by the Gazprom Neft Group.

The Company is committed to maintaining a “Net Debt/EBITDA” ratio at a level not exceeding 1.5. According to the terms of the Company’s loan agreements, the value of the “Consolidated financial debt/consolidated EBITDA” ratio should not exceed 3. In the current reporting period, the values of both ratios were lower than the specified thresholds.

Disclosing the results of activities regarding the management of the Gazprom Neft Group debt portfolio on the Company’s official corporate Internet website ensures the information transparency of the debt policy. During the reporting year, the Company kept the relevant section of its website updated.

Dynamics of Debt/EBITDA and Net Debt/EBITDA
Name 2010 2011 2012 2013 2014
Net Debt / ЕBITDA 0.86 0.71 0.51 0.59 1.44
Net Debt Threshold / EBITDA 1.50 1.50 1.50 1.50 1.50
Debt / EBITDA 1.06 0.82 0.80 0.99 1.87
Debt threshold / EBITDA 3.00 3.00 3.00 3,00 3.00

When raising debt financing, the Company takes into account the specifics of activities being funded as well as conditions on debt capital markets.

Among other means, the Company’s debt portfolio is optimised by diversifying its structure in terms of instruments and investors, enabling the Company to reduce its dependence on volatile debt capital markets. As of late 2014, the Company’s debt portfolio included such instruments as debt financing, credit under the guarantee of the Export Credit Agency (ECA), syndicated loans, local bonds, eurobonds and bilateral loans.

In 2014, the company had borrowings as follows:

  • the drawdown of credit funds on 17 March as part of an agreement on a non-revolving syndicated credit line for 2.15 mn USD dated 29 November 2013 at a rate of LIBOR + 1.50% p.a. with an average term of 3.5 years
  • the drawdown of 10 bn RUB on 15 October as part of one of three agreements signed on 3 September with OJSC Sberbank of Russia to open non-revolving credit lines for a cumulative amount of 35 bn RUB at a rate of 11.98% p.a. with an average term of 5 years
  • the drawdown of 10 bn RUB on 30 September as part of an agreement signed on 23 September with OJSC Rosselkhozbank to open a non-revolving credit line for 30 bn RUB at a rate of 11.90% p.a. with an average term of 5 years

As a result, during the reporting period the debt portfolio of the Gazprom Neft Group reached 563.4 bn RUB as of 31 December 2014 compared with 313.9 bn RUB as of 31 December 2013 (the main reason for growth was exchange rate differences). The borrowed funds raised in 2014 were used for general corporate purposes.

Debt portfolio structure by maturity date, mn RUB
2010 2011 2012 2013 2014
Short-term credits and loans and the current portion of long-term credits and loans.Short-term credits and loans 53,030 41,114 77,193 52,413 61,121
Long-term credits and loans 150,617 174,503 166,447 261,455 502,306
TOTAL 203,646 215,617 243,640 313,868 563,427
Percentage of short-term credits and loans 26.04 19.07 31.68 16.70 10.85
Percentage of long-term credits and loans 73.96 80.93 68.32 83.30 89.15
Calculations include debt and future interest, including interest not yet accrued.Debt repayment schedule of the Gazprom Neft Group, mn RUB
Name Under 6 months 6-12 months 1-2 years 2-5 years 5 years or more
Bank loans 15,797 23,460 78,335 169,132 6,905
Local bonds 12,452 2,031 23,212 32,434
Loan participation notes 5,880 2,532 6,566 80,530 200,107
Other loans 14,362 311 220 1,219 2,006
TOTAL 48,491 28,334 108,333 283,315 209,018

In light of sanctions imposed on the Company by the US, EU and several other countries in 2014, substantial effort has been carried out to minimise the consequences of these actions and the changes they have occasioned in the business and financial environments:

  • two new loan agreements were concluded with Russian banks for a total of 65 bn RUB under which 20 bn RUB had been drawn down as of 31 December 2014
  • drawdown of a non-revolving credit line for 300 mn USD in early 2015 from a syndicate of European and Asian banks
  • new opportunities for the Company to raise debt capital were analysed

Company management has largely succeeded in neutralising the negative effects of the deteriorating situation on debt capital markets:

  • the weighted average interest rate declined, moving from 3.68% p.a. as of 31 December 2013 to 3.48% p.a. as of 31 December 2014
  • the proportion of long-term borrowing increased from 83% as of 31 December 2013 to 89% as of 31 December 2014
  • the proportion of short-term borrowing in the total debt portfilio fell significantly, decreasing from 16.7% as of 31 December 2013 to 10.9% as of 31 December 2014
  • the average borrowing term declined slightly from 5.15 years as of 31 December 2013 to 4.49 years as of 31 December 2014

Potential instruments for raising funding in 2015

Depending on the Company’s need for debt financing, various instruments for raising it may be considered in 2015. To ensure the ability to quickly raise debt financing in the form of a local bond issue, the Company has made changes to its prospectus and resolved to issue exchange bonds (EB) series EB–01–04 and EB–07 in accordance with the latest changes in legislation on the securities market. The EB prospectus has indefinite duration, enabling the Company to quickly arrange an EB issue for up to 50 bn RUB for a period of up to 30 years inclusive should the need arise. The Company is also actively involved in improvements to legislation on the securities market with respect to the placement and circulation of local bonds. To this end, Gazprom Neft joined the Committee of Bond Issuers under auspices of the Moscow Exchange in 2014.

Credit Ratings

OJSC Gazprom Neft has been assigned credit ratings by three international ratings agencies — Standard & Poor’s, Moody’s and Fitch. The Comapay also has a credit rating from the Chinese agency Dagong Global Credit Rating Company Limited(Dagong).

In spring 2014, S&P, Moody’s and Fitch revised their outlooks on the Company to negative following a downgrade of Russia’s rating.

As of the end of 2014, all the Company’s credit ratings are at the same level as the country rating of the Russian Federation.

Credit ratings of OJSC Gazprom Neft as of 31 December 2014
Agency Scale Rating Outlook
Standard&Poor’s International scale in foreign currency BBB– Negative
National scale (Russia) ruAAA Negative
Moody’s International scale in foreign currency Baa2 Negative
Fitch Long-term default rating of issuer in foreign and national currency ВВВ Negative
Rating assignment date — 2 March 2015.Dagong Global Credit Rating Company Limited (Dagong) Long-term credit rating on obligations in the Russian currency АА Stable
Long-term credit rating on obligations in the foreign currency AA– Stable
Bonds in circulation as of 31 December 2014
Series Placement date If the offer envisages issue documentation.Offer date / maturity Issue volume, mn RUB Semi-annual coupon period.Current coupon rate Issue organisers
04 21/04/2009 (secondary placement — 05/08/2011) 16/04/2018 / 09/04/2019 10,000 8.2% Gazprombank, Renaissance Capital
08 08/02/2011 — / 02/02/2016 10,000 8.5% Gazprombank, Troika Dialog IC, Sberbank, Globexbank
09 08/02/2011 08/02/2016 / 26/01/2021 10,000 8.5% Gazprombank, Troika Dialog IC, Sberbank, Globexbank
10 08/02/2011 05/02/2018 / 26/01/2021 10,000 8.9% Gazprombank, Troika Dialog IC, Sberbank, Globexbank
Bonds purchased in the amount of 9,568,681,000 RUB on 9/02/2015 as part of offer11 07/02/2012 09/02/2015 / 25/01/2022 10,000 8.25% VTB Capital, Gazprombank
12 05/12/2012 29/11/2017 / 23/11/2022 10,000 8.5% Gazprombank, UniCredit
Total bonds in circulation 60,000
Redeemed bonds as of 31 December 2014
Series Placement date / actual maturity date Volume, mn RUB Coupon rate at maturity
03 21/07/2009 / 15/01/2013 (early based on issuer’s decision) 8,000 1%
EB-05 13/04/2010 / 09/04/2013 10,000 7.15%
EB-06 13/04/2010 / 09/04/2013 10,000 7.15%
Total redeemed bonds 28,000