Some Saudi ‘GRI’ ratings to negative

LONDON, May 9: Moody’s Investors Service, (“Moody’s”) has today affirmed the ratings of the following four government-related issuers (GRIs) domiciled in Saudi Arabia and changed their outlook to negative from stable. Saudi Arabian Oil Company (Saudi Aramco) Saudi Basic Industries Corporation (SABIC) Saudi Telecom Company (STC) Saudi Electricity Company (SEC) The rating actions follow Moody’s decision on May 1, 2020 to affirm the A1 rating of the Government of Saudi Arabia and change the outlook to negative from stable. Ratings rationale Today’s rating actions are a direct consequence of the sovereign rating action and reflect the credit linkages between the Government of Saudi Arabia and each of the four GRIs. While these corporates benefit to varying degrees from international assets and cash flows, they all have significant credit linkages to the Saudi Arabia sovereign and are exposed to the domestic environment including political, economic, regulatory and social factors.

Saudi Aramco Saudi Aramco is the world’s largest oil supplier and has exclusive access to nearly all of Saudi Arabia’s vast hydrocarbon resources. The company’s business and financial profiles have many characteristics of a Aaa-rated company, benefiting from its large operational scale, low cost structure and strong financial flexibility. Significant credit linkages with the Saudi Arabia sovereign constrain Saudi Aramco’s rating and therefore today’s action to affirm the A1 issuer rating and change the outlook to negative from stable mirrors the action taken on the sovereign rating. The company’s profitability is mainly driven by its upstream assets, which are located within Saudi Arabia. The government’s budget is highly reliant upon contributions from Saudi Aramco in the form of royalties, taxes and dividends and the country’s economy is dependent on oil, which accounted for about 31 percent of GDP and 76 percent of total exports in 2019.

Saudi Aramco’s a1 baseline credit assessment (BCA) is also constrained by the sovereign rating given credit linkages. Moody’s GRI assumptions include ‘very high’ interdependence between the government and Saudi Aramco and ‘very high’ likelihood of extraordinary support being provided to the company from the government if ever required.

SABIC SABIC is one of the world’s largest petrochemical producers and benefits from a competitive cost position and significant economies of scale. The affirmation of the A1 issuer rating and change of outlook to negative from stable mirrors the action taken on the sovereign rating. The majority of SABIC’s assets are located in Saudi Arabia and these production facilities benefit from having access to competitively priced domestic feed stock.

The company is currently facing a very challenging product price and demand environment following the collapse in oil prices and spread of the coronavirus outbreak. Financial performance will significantly deteriorate in 2020 and there is considerable uncertainty on the pace of recovery in 2021. The company has a strong balance sheet with Moody’s-adjusted net debt/EBITDA of 0.2x in 2019. The rating agency will continue to assess the impact of the pandemic on SABIC’s credit profile. SABIC’s BCA is a1 and Moody’s GRI assumptions include ‘high’ interdependence between the government and SABIC and ‘strong’ likelihood of extraordinary support being provided to the company from the government if ever required.

STC STC is the incumbent integrated telecommunications service provider in Saudi Arabia, with some international operations across the Middle East, Africa and Southeast Asia. The affirmation of the A1 issuer rating and the change of outlook to negative from stable is in line with that of the government and reflects the credit linkages between STC and the government and the fact that STC generates more than 90 percent of its cash flow in Saudi Arabia. STC’s long-term issuer rating of A1, which is aligned with the sovereign rating of the Government of Saudi Arabia, reflects its standalone creditworthiness as expressed by a BCA of a2, combined with a ‘high’ level of dependence and a ‘strong’ level of support from the government.

STC’s BCA remains supported by the company’s (1) solid financial profile, as illustrated by its consistently low debt/ EBITDA of below 1.0x; (2) leading position in the domestic market, where it holds a market share of around 70 percent; (3) strong EBITDA margin of around 45 percent; and (4) strong liquidity despite high dividend payments.

Besides the revenue concentration in Saudi Arabia, the BCA also takes into account (1) the competitive nature of the local telecom market; and (2) the saturation in Saudi Arabia’s mobile segment.

SEC SEC is Saudi Arabia’s electricity utility company. The affirmation of the A2 issuer rating and change of outlook to negative from stable mirrors the action taken on the sovereign rating and reflects the significant credit linkages between the company and the sovereign. All of SEC’s assets are located in Saudi Arabia and the company benefits from supportive government policies. SEC’s long-term issuer rating of A2reflects its standalone creditworthiness as expressed by a BCA of baa1,combined with a ‘very high’ level of dependence and ‘high’ level of support from the government.

SEC’s BCA remains supported by the company’s low business risk profile. The company enjoys a dominant domestic market position as the integrated and exclusive electricity provider in Saudi Arabia and operates under a regulatory framework that is supportive, although not as developed or contractually beneficial as in other Middle Eastern jurisdictions. We expect a reduction in capital spending following substantial tariff increases which should lead to a reduction in negative free cash flows.