Fitch: Rushydro, Gazprom Most Exposed to Russia Dividend Plan
OREANDA-NEWS. The Russian government's plan to increase the dividends it receives from state-controlled companies in 2016 will increase pressure on the credit profiles of some Fitch-rated companies, including Rushydro and Gazprom, Fitch Ratings says. Continued demands for higher payouts over the next few years could have a wider impact, but this would depend on how flexible the government was willing to be for companies with big investment plans, or those that might struggle to raise debt.
The government expects to receive an extra RUB100bn from its plan and said eight companies would provide most of this. Rushydro (BB+/Negative) is probably the most exposed of the rated companies because its leverage is already close to the 3.0x we generally consider the maximum appropriate for its rating.
It would be challenging for the company to increase the dividend from around 25% of earnings to 50%, as the government has requested, and keep leverage below 3.0x unless the higher dividend is offset by capex cuts. But the group has demonstrated capex flexibility in the past, and it is also negotiating a potential significant equity injection from VTB Bank, which would probably be enough to ensure leverage remained in line with rating guidelines even with a higher dividend payout.
Gazprom's (BBB-/Negative) recommended dividend is already 50% of its earnings under Russian accounting standards, adjusted for non-cash items. But we estimate its profit under IFRS could be double the figure reported under Russian rules. The government has said companies should pay 50% of whichever profit figure is higher, so unless it is given an exception it could have to double its planned dividend.
Even under this scenario, we would expect Gazprom's leverage in 2016 to be below the 2.5x that could trigger a downgrade. But a higher dividend would weaken Gazprom's liquidity and may force it to increase borrowings and reduce its massive capex programme. If the dividend payout ratio remained at the same level in 2017-2018, its rating could come under pressure.
It is not yet clear if the 50% rule will affect Gazprom's 96% subsidiary, Gazprom Neft (BBB-/Negative). If it does and leverage increases beyond our expectation the rating should still be supported by strong legal ties with its parent. Bashneft's (BB+/Stable) low leverage and good liquidity should allow it to increase its dividends without compromising its credit quality, although it may need to reduce its capex, which was to increase by almost 60% in 2016 in rouble terms.
Other Fitch-rated companies mentioned by the government should feel only a limited impact. Diamond miner ALROSA (BB/Stable) has had a 35% minimum payout since 2013. Increasing this to 50% would mean a likely leverage peak of 2.8x in 2017 compared to our previous forecast of 2.6x, before starting to recover from 2018. A dividend increase would therefore probably not be enough to increase leverage to the 3.0x that could trigger a downgrade. We upgraded shipping company Sovcomflot one notch to 'BB'/Stable in November, reflecting a steady improvement in its financial profile as tanker shipping has recovered. Our assumptions in that rating action were that dividends would be 50% of earnings and the government announcement therefore should not affect our forecasts for the group.
The order signed by Prime Minister Dmitry Medvedev on Monday clearly indicates a desire to extract more cash from state-controlled entities, but the government may also give companies leeway that could further reduce any impact. Specifically, the order allows dividend levels to be adjusted to take account of investment plans, the company's ability to raise new debt and the outlook for profits over the next three years.