OREANDA-NEWS. Fitch Ratings has affirmed Singapore-based Puma Energy Holdings Pte Ltd's (Puma Energy) Long-term Issuer Default Ratings (IDR) and Puma International Financing S.A's senior unsecured notes at 'BB'. The Outlook on the IDR is Stable

Puma Energy's ratings reflect the company's highly diversified vertically-integrated midstream and downstream distribution business model, and the execution risk embedded in its growth strategy.

Puma Energy is biased towards fuel distribution, with no direct global peer, a focus on high growth developing markets and holds leading domestic market positions. We expect it to continue to generate steady funds from operations (FFO), underpinned by stable unit margins, with volume growth driven by acquisitions and growing long-term demand in developing countries.

Puma Energy's strategy involves high acquisition/capex spend. FFO readily marketable inventories (RMI) and lease-adjusted net leverage peaked at 4.5x in 2014, a level that is not commensurate with a 'BB' rating. However, we expect it to deleverage to just below 4x in 2015, and retain adequate cash conversion (excluding developmental capex) and liquidity sources, supporting the Stable Outlook.

KEY RATING DRIVERS

Limited Debt-funded Acquisitions/Capex
Following substantial spending on capex and acquisitions over the past two years (USD1.4bn p.a), we include in our forecasts for the current ratings modest expansion/acquisition of USD500m p.a over the next four years, funded by internally generated operating cash flows.

We expect any capex & acquisitions over the USD500m p.a mark that is not funded by internal cash flows to be financed by external sources other than debt. While we acknowledge that acquisitions will inherently lead to an increase in size and diversification, Puma Energy's ratings could come under pressure from material debt if it were raised to fund such purchases.

Deleveraging Expected
We expect Puma Energy to deleverage to below 4x beyond 2015, due to an expected slowdown in debt-funded acquisition/capex. We expect latest acquisitions to continue contributing to the company's top line in 2015.

In 2014 Puma Energy's debt protection measures weakened with FFO RMI and lease-adjusted net leverage peaking at 4.5x. This was due to rapid expansion, not sufficiently offset by improved profitability, and an increase in operating leases as a result of an Australian acquisition. Operating leases for the group increased to USD122m in 2014 (2013: USD22m), resulting in an increase of USD800m in off-balance sheet debt.

Stable Margins
The lower oil price has not materially impacted Puma Energy's EBITDA in absolute (USD) terms. Puma Energy mainly operates in semi-regulated and fully regulated markets, where the government sets a margin over the price for distributors, which results in stable predictable EBITDA unit margins. In free markets, Puma Energy systematically hedges its commodity price exposure. Hence lower oil prices do not impact the distribution margin and as a result does not affect its EBITDA/m3. In terms of volumes, lower oil prices can have a slightly positive impact on Puma Energy, as it can lead to increased consumption and therefore translate into an increase in sales volumes.

Diversified with Leading Market Shares
The current ratings reflect Puma Energy's high business, geographic and customer diversification. The group benefit from its unique integrated business model, with no direct peer on a global basis. Close to 50% of its 2014 EBITDA was generated in investment grade-rated countries, with Australia as the main contributor, in spite of it being present in many developing countries. The ratings also factor in Fitch's expectations that oil products will remain in demand in developing markets due to their essential nature, therefore enjoying limited price elasticity.

Limited Price, FX Risk
The 'BB' ratings incorporate our view of adequate risk management. Puma Energy hedges its physical supply. All of its supply stock is either pre-sold or hedged against price fluctuations. In addition, in regulated markets, the maximum margins are often established with a reference to US dollars, which allows Puma Energy to increase prices in local currency terms in response to currency depreciation. Aside from currency hedges, Puma Energy mitigates foreign currency fluctuations through natural hedges such as borrowing in local currencies and setting maximum days receivables within 10 - 15 days.

RMI Adjustments
In evaluating leverage ratios and interest coverage ratios, Fitch excludes debt and the interest costs used to finance RMI (such as refined oil products) as Puma Energy's inventories are protected against price risk and fulfils most if not all of the eligibility criteria as set out in the Commodity Processing and Trading Companies, Ratings Navigator Companion report dated 3 February 2015. The differential between RMI adjusted and RMI unadjusted FFO net leverage is around 1.0x, supporting the IDR at the 'BB' level. In our interest cover metrics, interest costs for RMI are reclassified as cost of goods sold.

KEY ASSUMPTIONS

Fitch's expectations are based on the agency's internally produced, conservative rating case forecasts. They do not represent the forecasts of rated issuers individually or in aggregate. Key Fitch forecast assumptions include:

-Stable unit margins
-Double-digit increase in volumes for 2015 and 2016, reflecting the impact of acquisitions and capex
-Acquisitions/capex of around USD500m funded by internally generated FFO

RATING SENSITIVITIES

Future developments that could lead to a positive rating action include:-
- Enhanced business risk profile reflecting a successful execution of its growth plans through acquisitions and greenfield projects, while maintaining sufficient geographic diversification.
-Steady profitability and internal cash flow growth, with EBITDAR surpassing USD1bn
- Free cash flow (FCF)/EBITDAR excluding expansionary capex (cash conversion) at or above 35% on a sustained basis (2014: 67% )
- FFO adjusted net leverage (RMI adjusted) below 3.0x with evidence of deleveraging on a sustained basis
- Maintaining FFO fixed charge coverage above 4.5x (2014: 2.6x RMI adjusted)

Future developments that could lead to a negative rating action include:
- A sharp deterioration in sales volume due to a competitive or regulatory environment or reflecting difficulties in integrating acquisitions with EBITDAR falling below USD500m
- FCF/EBITDAR excluding expansionary capex (cash conversion) decreasing to 15% or below on a sustained basis
- FFO adjusted net leverage (RMI adjusted) remaining above 4.0x on a sustained basis

LIQUIDITY AND DEBT STRUCTURE

Liquidity is adequate. At end-2014 the group had a total of USD978m of available undrawn credit facilities. In addition, the company had USD459m of unrestricted cash on its balance sheet. This is sufficient to cover short-term debt of USD584m maturing in 2015. In May 2015, Puma Energy increased its USD725m senior bank facility to USD1.25bn and extended the maturity (USD750m three-year and USD500m one-year facilities).

In our analysis, we regard Puma Energy's opco debt (USD633m as at end-2014 excluding inventory financing which is considered as self-liquidating, or 1x EBITDA) as prior-ranking to the unsecured debt at Puma International Financing S.A. level.

Currently we envisage the level of prior-ranking debt/EBITDA to stay comfortably below the 2.0x-2.5x trigger for structural subordination and lower recoveries for unsecured debt, as the group continues to refinance part of its opco debt with holdco level debt. As a result the unsecured debt rating is equalised with that of the IDR at 'BB'.