Moody's Downgrades Bulgaria's Petrol Ratings

"The rating downgrade reflects the sustained deterioration in adjusted debt and cash flow metrics of the group over the last twelve months as a result of stagnating operating performance, sizeable book and cash losses under a portfolio of derivatives on crude oil used by Petrol to hedge its inventory risk and aggressive financial policies as illustrated by the group's decision to use a significant portion of the proceeds from the sale of 75 petrol stations to [Russia's oil giant] Lukoil to upstream cash to its ultimate parent through the buyback of treasury shares [91 million levs ($60 million/46.6 million euro)] rather than to apply to debt reduction or to retain in support of its liquidity needs," Moody's said in a statement.

In April, Petrol said it would sell 75 petrol stations and an oil storage depot to the Bulgarian unit of Lukoil in a deal worth a combined 237 million euro. The company is the country's largest fuel retailer with 457 stations operated following the deal with Lukoil.

Petrol used the remainder of the proceeds to finance working capital consumption of 81 million levs, derivatives losses of 74 million levs, and repayments of bank and trade loans of 59 million levs during the first half of 2008, Moody's added.

Moody's also noted that the disposal of these profitable assets has substantially weakened the business profile of the group.

"The action also reflects the agency's concerns over Corporate Governance reflected by the issuer's history of qualified accounts and repeated accounting errors as well as by the size of the group's intra group loans including to its ultimate parent, which is directly controlled by private individuals."

The ratings remain under review for further downgrade as the review for downgrade will focus on the steps that Petrol management and shareholders would consider implementing in order to restore the capital base of the group and support the liquidity requirements of its network in the near term future as well as the outlook for the group in light of current market conditions and the recent changes to its business profile, it added.

Earlier in October Fitch Ratings placed Petrol's 'B-' Issuer Default Rating (IDR) and 'B-' senior unsecured rating for 100 million euro notes on Rating Watch Negative.

Petrol (www.petrol.bg) is 69.1%-owned by Bulgaria's Petrol Holding group.

Shares of the company closed 0.25% lower at 7.98 levs on the Bulgarian Stock Exchange on Thursday in a volume of 1,000 stocks.

(1 euro = 1.95583 Bulgarian levs)