SOFIA (Bulgaria), November 10 (SeeNews) - Fitch Ratings downgraded on Monday the Issuer Default rating (IDR) of Bulgaria's fuel distributor Petrol and the senior unsecured rating of its 100 million euro ($128.2 million) notes due in 2011 to 'CCC' from 'B-' (B minus).
Both ratings have been removed from rating Watch Negative and the rating agency has assigned a negative outlook to the long-term IDR, Fitch said in a statement.
The downgrades were prompted by a sizeable share repurchase undertaken by Petrol in the second quarter of 2008, the tghe increased financial leverage and Fitch's concerns about the corporate governance, the company added.
Concerns about diminished earnings, due to an asset disposal of an important part of the petrol station network, and large losses on derivatives transactions have also negatively affected Petrol's Business and financial profile, according to Fitch.
Petrol AD's financial profile, including its credit metrics, worsened substantially in the second quarter of 2008 due to a 90.7 million levs ($59.3 million/46.2 million euro) share repurchase, derivative losses of 71.5 million levs, working capital needs of 81.1 million and because of loans granted to related parties outside the Petrol group.
Petrol's net profit surged to 217 million levs through September from 29 million levs a year ago, mainly due to the sale of assets.
However, Fitch estimates that Petrol's net leverage will increase at end-2008 on the back of weaker EBITDA generation, which was driven by lost volume and earnings.
Fitch is concerned about the company's corporate governance, especially as completion of the share buyback was not in accordance with the planned use of proceeds from the sale of cash-generating assets to Lukoil Bulgaria, as the agency deems the share buyback as a quasi-dividend payment, which benefits shareholders to the detriment of bondholders.
Additionally, Petrol AD granted a $20 million ($15.6 million) loan to a related company outside the group, while it is still a subject to numerous other sizeable related-party transactions, including inter-company loans and debt guarantees, Fitch said.
Petrol's management has stated to Fitch that Petrol's use of the disposal proceeds complies with provisions in the 100 million euro bond documentation.
The negative outlook also reflects the worsened Business profile of Petrol following the sale of the cash-generating assets to Lukoil Bulgaria. Despite management plans to recover the lost volume and earnings in a short period of time, planned acquisitions in the Bulgarian market and investments in Petrol's network have been delayed.
However, Fitch assesses Petrol's cash position of 89.4 million levs ($58.4 million/45.6 million euro) at end-June 2008 as sufficient to repay short-term debt. This relates to the 15 million levs bonds maturing on November 20, 2008. Petrol's management recently confirmed to Fitch that sufficient funds had been earmarked to redeem the bonds.
(1 euro = 1.95583 Bulgarian levs)
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