Fitch Downgrades Stirol Rating To “B-“.

Fitch Ratings announced today that it had downgraded Stirol’s Issuer Default and the senior unsecured rating of the company’s $125m notes from “B” to “B-“, while retaining its short-term rating “B”. All the ratings remain in the Rating Watch Negative (RWN) to reflect Stirol’s “failure to obtain covenant waivers to date.” The downgrade was motivated by the yoy slump in Stirol’s financial performance in 1H06, the risk of higher gas prices in 2007, a delay in providing 2005 IFRS financials, and by a number of breaches of non-financial covenants under the terms of its Eurobond placement. In particular, Fitch mentioned that the company’s 1H06 UAS operating profit decreased by 45% yoy, to $35.7m, while revenues grew by 4%. The agency noted that although there is a risk that Stirol’s lenders may initiate accelerated repayment of its debt due to covenants breaches, it is mitigated by the company’s currently strong liquidity. It also added that the RWN may be resolved once Stirol obtains covenant waivers from its lenders. Vladimir Nesterenko: Although we did not expect Fitch to downgrade Stirol’s ratings, we admit that we did not account for the specifics of Fitch’s approach. It looks like the downgrade was motivated by Stirol’s inability/lack of readiness to apply for covenant waivers (which most of its Eurobond investors expected), rather than by deterioration of its credit standing. Although Stirol’s 1H06 financials have worsened on a yoy basis, its 1H06 15.4% net margin provides the company with enough cash flow to service its debts. The half-grade rating decrease may motivate the company to be more diligent with respect to its obligations. However, a further downgrade of Stirol’s rating may result in an early redemption claim under the “Put Event” provision embedded in the loan agreement with the Moscow Narodny Bank.