Russia's OAO Gazprom may be entering an epic expansion binge, but, for now, analysts are not worrying about its impact on the $1.25 billion in secured export notes maturing in 2020.

The company has announced that it will bid for Yuganskneftegas, a production unit of Russian oil giant OAO NK Yukos, which has been reeling under the weight of overwhelming tax debt. Gazprom is angling for other assets as well, in an aggressively acquisitive drive that could ring up $50 billion in total, according to reports.

"We don't see it affecting performance risk, which is a component of the secured export notes," said Rob Richards, chief credit officer for Russia and CIS at Standard & Poor's, which rated the transaction BBB-'.

Issued in June, the notes marked the country's first market foray into structured finance (see ASR 8/2/04). The structure is a collateralized loan secured by two export contracts to major Western European companies. ABN AMRO, Merrill Lynch and Morgan Stanley led the deal.

In a report focused mostly on the impact the Yukos bid might have on the corporate's credit strength, S&P reiterated its view that the performance and bankruptcy risks for the structured transaction are lower than the default risk of the corporate, which has a BB-' rating. In the wake of Gazprom's announcement, S&P put the company on Watch Developing. While a diversifying asset base could fortify the gas giant, politically motivated investments following the acquisition would be detrimental, the agency said.

Yuganskneftegas's starting price is $8.6 billion, several billion dollars below a recent third-party valuation of the company, according to S&P. Deutsche Bank Securities is advising the purchase and is reportedly pushing Gazprom to add energy peers Sibneft and Surgutneftegaz to its expanding waistline as well.

Gazprom will soon be majority controlled by the state via a merger with Rosneft - many say it was under de-facto control already - and the consensus is that gobbling up other energy companies is a sign that the government is hungry to extend its control in the industry. Credit strength would be jeopardized if investments down the road were driven more by political concerns than economics, a throwback to the days of the U.S.S.R. Those that fear politics are lurking behind the offer are especially uneasy with the fact that the target is Yukos, whose former head Mikhail Khodorkovsky is in jail for fraud and tax evasion. Some observers see his imprisonment as a payback by Russian President Vladimir Putin for Khodorkovsky's candid support of the political opposition.

More state involvement in Gazprom is not necessarily a bad thing, argues Laurence Watts, head of CIS and Eastern Europe corporate research at Barclays Capital. "As an entity so aligned to the Russian state, one could argue that Gazprom's rating could go higher," he said, in a report. Watts sees upgrades in the works for Gazprom by all three agencies.

From Fitch Ratings, which rates the export notes BBB-', there was no indication that Gazprom's possible shopping spree would affect the structure. After the news, the corporate's BB' rating remained on Watch Positive following the agency's upgrade of the sovereign to BBB-' on Nov. 18.

There be may be a hint of a potentially upward bias for the SENs, however, as a result of a merger between Gazprom and Rosneft. In a release on the corporate's upgrade, Fitch said the merger would "increase the government's vested interest in keeping Gazprom as a going concern," which is at the core of the export notes' rating.

At any rate, Gazprom will likely be piling on debt to fund the acquisitions, which will probably keep pressure on outstanding paper, including the export notes. Barclay's Watts said he expected the company to issue another secured bond as part of an assortment of funding alternatives.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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