OREANDA-NEWS. Fitch Ratings has downgraded Tatarstan government-owned investment holding company OAO Svyazinvestneftekhim's (SINEK) Long-term foreign and local currency Issuer Default Ratings (IDRs) to 'BB+' from 'BBB-' and Short-term foreign currency IDR to 'B' from 'F3'. The Outlooks on the Long-term IDRs are Negative.

The downgrade follows the repayment of the notes issued by Edel Capital S.A., which were guaranteed by the Republic of Tatarstan (RoT: BBB-/Negative). SINEK used a combination of internal funds and borrowing from a related party, AK BARS Bank (ABB, BB-/Negative, Viability Rating b-), to fund the repayment. Fitch previously noted that if SINEK's prospective debt was not guaranteed by the RoT, we would rate SINEK using a top down approach one notch below the rating of its parent. Fitch views SINEK's ties with its owner as strong. These include 100% ownership by RoT, strong tangible sub-sovereign support, and the influence exerted by the Tatarstan government on SINEK and its portfolio of companies. The Negative Outlook on SINEK mirrors the Outlook on RoT.

Fitch has also withdrawn Edel Capital S.A.'s USD250m loan participation notes' foreign currency senior unsecured rating, because the notes have been repaid.

KEY RATING DRIVERS
Top Down Approach
SINEK holds stakes in the largest corporations in Tatarstan and we view its operational and strategic ties with its sole owner as strong. However, without direct legal ties in the form of a debt guarantee, we notch down SINEK's ratings from its parent to account for the structural subordination of SINEK creditors and the holding's exposure to ABB. SINEK's ratings were previously aligned with RoT's ratings due to the debt guarantee.

Speculative Grade Standalone Profile
SINEK's standalone profile is supported by stable, albeit concentrated, dividends from investment grade rated OAO Tatneft (BBB-/Negative; approximately 70% of total dividend income). SINEK's credit profile is constrained by weaker companies in its portfolio (ABB), which have received support from the holding in the past and the fact that SINEK's cash is mainly held at ABB. We therefore consider SINEK's standalone profile to be in the 'BB' rating category.

ABB's Weak Credit Profile
Fitch views the probability of the RoT providing support for ABB as only moderate, and therefore notches down the bank's ratings from its parent, the RoT by three notches. The notching reflects the region's currently indirect and somewhat non-transparent ownership, some concerns over RoT's financial flexibility and ability to provide capital support in a timely fashion and ABB's weak asset quality, as ABB is still heavily exposed to highly risky corporate lending and non-core assets. Fitch expects ABB will be supported in 2015 with cash injections from the government or its agencies. We understand that SINEK is not expected to provide direct funding to the bank in 2015.

Contingent Liabilities
In July 2012, ABB issued USD600m of bonds, half of which were purchased by a subsidiary of SINEK. At the discretion of ABB's investor holding the remaining bonds, SINEK may be obliged to repurchase up to USD50m annually between 2015 and 2017 of the bonds placed by the bank in 2012. We view the potential cash outflow as manageable for SINEK depending also on the size of capex and donation spending. The notes issued by ABB currently trade below par value and we conservatively assume SINEK will be obliged to repurchase the notes in 2015-2017.

RATING SENSITIVITIES
Positive: Future developments that may lead to positive rating action include:
- An upgrade of RoT's ratings.

Negative: Future developments that may lead to negative rating action include:
- A downgrade of RoT's ratings.
- Direct and material support provided to SINEK's portfolio companies resulting in a significant deterioration of SINEK's financial profile.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Tatneft remains a key dividend contributor.
- Donation spending varies between USD40m and USD50m annually.
- Strategic and operational ties with RoT remain strong, legal ties to weaken as prospective debt will not be guaranteed.

LIQUIDITY AND DEBT STRUCTURE
At end-2014, short-term debt USD275.3m and included USD257m international bonds and a loan from RoT's Ministry of Finance. Cash on balance sheet at end-2014 totalled USD27m, while deposits were USD100.8m. Deposits are held mainly at ABB. In 2014 SINEK disposed of its holding in one of the portfolio companies and the transaction has supported its liquidity as part of the proceeds was received in 2015. In March 2015, SINEK's cash and deposit balance amounted to RUB14.9bn (USD245m).