The downgrade of the credit rating of JSC “Rosgeologia” (hereinafter, Rosgeo, or the Company) and the change in the outlook from Stable to Negative is due to the deviation of the Company’s financial performance for 2023, as reflected in the annual IFRS statements, from the previous forecast, as well as more conservative expectations of the Company regarding its financial performance in 2024–2026. According to Rosgeo, these changes are associated with a redistribution of revenues generated by the Company’s core segments. In 2023, revenues from parametric drilling, as well as from marine operations, the most marginal segment, decreased due to a shrink in the government contracts for such work and a fall in the demand for offshore operations from commercial customers. On the backdrop of this decrease, the Company’s costs of ship and drilling equipment downtime and the costs of eliminating geological complications went up. The Agency notes the following changes: a fall of FFO before net interest and taxes to a negative indicator of –RUB 1.4 bln (vs. RUB 4.7 bln for 2022), an increase in total debt to RUB 22.7 bln (including financial lease) in 2023 (vs. RUB 14.9 bln in 2022), and an increase in debt service costs to RUB 2 bln in 2023 (vs. RUB 1.6 bln in 2022).
The credit rating of Rosgeo has been set at A-(RU), which is two notches higher than the Company’s standalone creditworthiness assessment (SCA), which ACRA determined at bbb. This is due to the state’s low level of support for the Company and the average degree of dependence on homogeneous risk factors (according to ACRA’s methodology).
Rosgeo’s SCA is based on its strong business profile, which stems from the Company’s role as a government contractor for the reproduction of the country’s mineral resource base, the increasing share of its participation in commercial projects, a stable market position (due to good business diversification, both in terms of performance of various types of geological exploration activities and due to its presence in various Russian regions and foreign markets), as well as adequate corporate governance. The Company’s financial risk profile is characterized by good profitability (largely thanks to the successful implementation of partner programs), medium leverage, and a good liquidity position. Among other things, the rating is constrained by the small size of business and industry risks. In ACRA’s opinion, the credit risk in the geological exploration industry is above medium because this industry depends on the commodity cycle to a significant degree.
Rosgeo is engaged in geological prospecting and identification of the resource potential of promising territories of Russia, its continental shelf and the water areas of its internal seas, and the bottom of the World Ocean, Arctic and Antarctic, localization and assessment of the resource potential of the unallocated subsoil fund in developed and new areas, as well as government monitoring of the state of subsoil. The Company is on the lists of the country’s strategic and systemically important enterprises.
key assessment factors
The state’s low level of support for the Company and the medium degree of dependence on homogeneous risk factors are due to the share of revenues from government contracts, which is about 30%, as well as low risks to the budget in the event of a default of the Company, and the low impact of disruption to the Company’s activities on the social situation in the country. At the same time, the level of support is influenced by significant strategic and operational control by the state: the government determines the Company’s development strategy, investment plans, and dividend policy. The Company’s strategic importance is based on the fact that Rosgeo is the only company in Russia that carries out a complete spectrum of geological exploration activities on the formation of a prospecting reserve under the state order for the replenishment of subsoil reserves. Rosgeo has been used to create a geological exploration holding company, which includes around 40 geological enterprises and research institutes across the country. The Company’s geological prospecting activities cover hydrocarbons (oil and gas), solid minerals (coal, gold, diamonds, etc.), and other resources such as water. In 2022, the Government of the Russian Federation issued a directive on providing capital injections to the Company annually from 2022 to 2024 in order to replenish its fixed production assets; in accordance with this directive, the Company has already received RUB 5.9 bln.
The medium degree of dependence on homogeneous risk factors is determined by the share of government contracts in the Company’s revenues, the relatively low volume of subsidies received, the absence of major dividend payments to the state, as well as the absence of dependence of the state and the Company on one sector of the economy, and exposure to similar credit risks.
Strong business profile and good geographic diversification. Rosgeo’s activities are focused on early-stage geological exploration. The Company has extensive experience in geological exploration both onshore and offshore, including transition zones. The contract base shows that the Company has work until 2026, and currently amounts to RUB 65 bln (taking into account contacts with a high possibility of being signed). In the past, the contract base has demonstrated a slight degree of volatility due to fluctuations in minerals markets, which has been partially offset by the diverse range of minerals that the Company can search for. The Company operates throughout Russia and in a number of foreign countries. The Company’s fixed assets are characterized by a high degree of physical wear and tear, which increases the need for capital investments. The Company is currently working to reduce the degree of wear and tear of fixed assets by updating them at the expense of the provided budget investments (additional capitalization), as well as the investment program implemented by the Company at its own expense.
Medium leverage and low coverage. In view of the Company’s operating lease expenditures increasing from RUB 0.9 bln in 2020 to RUB 1.3 bln in 2022, and in order to take them into account to compare credit ratings under different asset ownership models, ACRA applied leverage and coverage assessment indicators that take into account operating lease expenses, namely, total debt adjusted for operating lease to FFO before fixed payments (interest payments and operating lease expenses) and FFO before fixed payments to fixed payments.
According to ACRA’s estimates, in 2023 the ratio of adjusted total debt to FFO before fixed charges was negative due to a decrease in FFO before fixed charges. The average annual value of this indicator is expected at 3x in 2024–2026 as a result of higher FFO before fixed charges.
As of May 16, 2024, the Company’s debt included bank loans, targeted loans, and commercial bonds. Interest rates are fixed and floating (tied to the key rate of the Bank of Russia); the Company’s debt is denominated entirely in Russian rubles and balanced in terms of creditors.
According to ACRA’s estimates, in 2023 the ratio of FFO before fixed charges to fixed charges was also negative. The Agency predicts that this indicator will average to 3.3x in 2024–2026.
Small size of business and good profitability. According to ACRA’s estimates, the Company’s FFO before net interest and taxes fell to a negative of RUB -1.4 bln in 2023 (vs. RUB 4.9 bln in 2022), but it will grow to about RUB 7 bln in 2024–2026. According to ACRA’s estimates, the FFO before net interest and taxes margin was negative in 2023 (vs. 18% in 2022), but in 2024–2026, the indicator is expected to grow to positive values.
Good liquidity amid negative free cash flow (FCF). The liquidity is supported by the balance of funds in the Company’s accounts (RUB 8.2 bln as of May 16, 2024) and open credit lines (RUB 6.9 bln as of May 16, 2024).
The Company’s FCF, calculated according to ACRA’s methodology, was negative in 2018–2021, but at the end of 2022 it was positive. In 2023 it went negative, however, the Agency forecasts the FCF margin to return to the positive area in the future.
The Company’s ratio of capital expenditures to revenues was 4% in 2020–2021; in 2022 it was 12%, and in 2023 and thereafter it is expected to decline gradually.
Adequate corporate governance. The Company’s strategy is clear and consistent, includes specific targets and detailed roadmaps, and has measurable performance indicators. The 2014–2020 strategy was aimed at developing the Rosgeo holding. In view of the completion of that stage, the Company developed a strategy for 2020–2025, which is based on measurable financial and non-financial targets. The risk management structure of the Company includes a risk map that describes risks and how to mitigate them, budget rules, financial and credit policies, provisions on the risk management system, and a declaration on accepting a preferred risk target system. The Company has a single treasury. The Company’s management structure complies with corporate governance standards, and there are regulatory documents, including provisions on the audit committee, board of directors, executive board, and a code of corporate governance. However, ACRA notes that the structure of corporate governance and risk management is in line with Russian practice. Rosgeo includes a large number of legal entities, which is due to production needs and the specific nature of geological exploration work. The Company regularly compiles and discloses its consolidated audited IFRS financial statements.
key assumptions
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Further implementation of the Company’s strategy until 2025.
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Contractual obligations carried out in full and on time.
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Annual growth of production prices not exceeding the growth of revenues.
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Dividend payments in 2024–2026 in line with the Company’s projections.
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Annual investments made according to the plan.
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Creditors agreeing not to apply penalties to the Company for the breach of its covenants in 2023.
potential outlook or rating change factors
The Negative outlook assumes that the rating will highly likely be downgraded within the 12 to 18-month horizon.
A positive rating action may be prompted by:
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Weighted FFO before net interest payments and taxes exceeding RUB 5 bln amid simultaneous decline of weighted adjusted total debt to FFO before fixed payments to below 3.5x;
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Weighted ratio of FFO before fixed charges to fixed charges exceeding 3x;
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Significant growth of the Company’s systemic importance to the Russian economy.
A negative rating action may be prompted by:
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Weighted FFO before net interest and taxes falling below RUB 0.5 bln;
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Weighted FFO before net interest and taxes margin falling below 8%;
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Weighted adjusted total debt to FFO before fixed payments exceeding 5x;
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Substantial decline of the value of the contract base;
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Substantial deterioration of access to external sources of liquidity;
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Substantial decline of the Company’s systemic importance to the Russian economy;
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Creditors failing to reach an agreement not to apply penalties to the Company for the breach of its covenants in 2023.
RATING COMPONENTS
SCA: bbb.
Adjustments: none.
Support: state.
issue ratings
JSC “Rosgeologia”, series 01 (RU000A103SV6), maturity date: September 26, 2024, issue volume: RUB 6 bln — A-(RU).
Rationale. The issue represents senior unsecured debt of Rosgeo. In accordance with the methodology, ACRA applied the detailed approach to estimate the recovery rate for the issue, which belongs to Category II. Therefore, the credit rating of the issue is equivalent to that of the issuer (Rosgeo), i.e. A-(RU).
regulatory disclosure
The credit ratings of JSC “Rosgeologia” and the bond issue of JSC “Rosgeologia” (RU000A103SV6) have been assigned under the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Non-Financial Corporations Under the National Scale for the Russian Federation, Methodology for Analyzing Rated Entities Associated with a State or a Group, and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities. The Methodology for Assigning Credit Ratings to Financial Instruments under the National Scale for the Russian Federation was also applied to assign the credit rating to the above issue.
The credit rating of JSC “Rosgeologia” and the credit rating of the bond issue (RU000A103SV6) of JSC “Rosgeologia” were published by ACRA for the first time on November 9, 2020 and October 4, 2021, respectively. The credit rating of JSC “Rosgeologia” and its outlook and the credit rating of the bond issue (RU000A103SV6) of JSC “Rosgeologia” are expected to be revised within one year following the publication date of this press release.
The credit ratings were assigned based on data provided by JSC “Rosgeologia”, information from publicly available sources, and ACRA’s own databases. The credit ratings are solicited and JSC “Rosgeologia” participated in their assignment.
In assigning the credit ratings, ACRA used only information, the quality and reliability of which were, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.
ACRA provided no additional services to JSC “Rosgeologia”. No conflicts of interest were discovered in the course of credit rating assignment.
