OREANDA-NEWS. Fitch Ratings has downgraded OAO Svyazinvestneftekhim's (SINEK) Long-term foreign and local currency Issuer Default Ratings (IDRs) to 'BBB-' from 'BBB'. The Short-term foreign currency IDR has been affirmed at 'F3'. The Outlook is Negative. Fitch has also downgraded Edel Capital S.A.'s USD250m loan participation notes due 2015 foreign currency senior unsecured rating to 'BBB-' from 'BBB'. The notes are guaranteed by SINEK and the Republic of Tatarstan (RoT; BBB-/Negative).

The rating actions follow the downgrade of the RoT (see 'Fitch Takes Rating Action on 9 Russian LRGs on Sovereign Downgrade' dated 16 January 2015 at www.fitchratings.com).

SINEK is the Tatarstan government's investment holding company. Its ratings are linked to the sub-sovereign rating of the RoT, given the latter significant influence over the company. Direct support from the republic includes the RoT government's explicit RUB13bn guarantee of the USD250m notes (on-lent to SINEK), a RUB1bn (USD16.6m) loan as well as significant contributions in kind historically made by the RoT.

KEY RATING DRIVERS
Increased Guarantee Needed
The RoT has issued a guarantee of RUB13bn to support SINEK's USD250m bond maturing in August 2015. In case of significant rouble depreciation, leading to it trading above an exchange rate of more than RUB47.32 to the US dollar for 20 consecutive business days, the issuer may be obligated under the terms in the bond documentation to repay part of the bond. Alternatively, SINEK may seek a larger guarantee from the RoT to comply with the notes' over-collateralisation covenant. This 20-day period related to the exchange rate expired at the end of 2014.

SINEK is currently in the process of securing a larger guarantee from the RoT, but this requires legislative action from the State Council. On 13 January 2015, the RoT sent a notice to Edel Capital and the trustee stating that it intends to apply to the State Council for an increase in the guarantee. The bond covenant says that SINEK has 30 business days from the date on which the State Council is convened for its next session to secure an increase to the guarantee (or 90 calendar days from the date the notice was sent, whichever occurs earlier). SINEK estimates the next State Council session will convene sometime in February.

Under the terms of the guarantee, in the event of a default by Edel, the RoT is obliged to pay the rouble-denominated amount of interest and principal that Edel has failed to pay. Due to this legally binding and unconditional guarantee, the issue is rated at the same level as that of the RoT. Fitch estimates SINEK will need to pay around USD83m to comply with the bond covenants in the event the RoT does not increase the guarantee (using the USD/RUB rate of 60.1).

Fitch will likely take additional negative rating action if SINEK fails to receive an increase in the guarantee from the RoT before the 30-day deadline. This outcome would raise questions about our assumption of direct support that allows for an alignment of SINEK's rating with the RoT.

Standalone Rating in 'B' Category
SINEK'S business and financial profile are largely constrained by its reliance on a subordinated dividend stream from a portfolio of local companies. Fitch views SINEK's credit profile as subordinate to the weighted credit profile of the portfolio companies due to the lack of direct legal access to operating cash flow and assets, which contributes to SINEK's standalone credit rating being in the 'B' rating category. OAO Tatneft (BBB-/Negative) remains the main source of dividend income for SINEK.

Liquidity and Deposits
SINEK's short-term debt at 15 January 2015 is only from the USD250m notes due in August 2015. Cash on the balance sheet at 15 January 2015 totalled USD21.7m, while deposits were USD128m. Deposits are held mainly at AK BARS Bank (BB-/Stable). Fitch anticipates that SINEK will refinance part of this debt upon maturity. In the event refinancing is not undertaken, Fitch believes SINEK will need to seek a larger dividend from its investment companies, or rely on funds from the republic.

AK BARS Bank
Fitch considers AK BARS Bank's financial situation as a constraint on SINEK's financial profile. AK BARS' rating could come under pressure if there was any major weakening in the relationship between the RoT and the bank, for example, as a result of changes in any key senior regional officials or pressure from the federal authorities for the RoT to divest its stake in the bank (although neither of these are currently expected by Fitch).

Contingent Liabilities
In July 2012, AK BARS Bank issued USD600m of bonds, half of which were purchased by a subsidiary of SINEK. At the discretion of AK BARS Bank's investor holding the remaining bonds, between 2015 and 2017 SINEK may be obliged to repurchase up to USD50m annually of the bonds placed by the bank in 2012. We view the potential cash outflow as manageable for SINEK depending on the capex amount and donation spending.

Debt Structure
In addition to the related party loan, SINEK's debt primarily includes Edel Capital S.A.'s USD250m loan participation notes on-lent to SINEK. The notes included a put option that became exercisable in August 2012. The redemptions under the put option to date have been insignificant.

RATING SENSITIVITIES
Positive: The Outlook is Negative, meaning Fitch does not anticipate any positive rating action. However, future developments that may lead to positive rating action include:
- Upgrade of the RoT's ratings.

Negative: Future developments that may lead to negative rating action include:
- Further downgrade of the RoT's ratings.
- Lack of guarantees of future debt issues may result in a reassessment of the strength of the relationship with the RoT.
- Direct and material support provided to SINEK portfolio companies resulting in a significant deterioration of SINEK's financial profile.