Fitch cuts PNK Orlen to BBB-

Fitch Ratings said it downgraded PKN Orlen SA's issuer default rating to BBB- from BBB and affirmed its short-term rating at F3.

Both ratings have been removed from Rating Watch negative, and a negative outlook was assigned to the issuer default rating.

The agency said the downgrade reflects a considerable increase in PKN Orlen's leverage after the acquisition of Mazeikiu Nafta AB. PKN Orlen took operational control over Mazeikiu Nafta on Friday after the acquisition of a 53.7% stake in Mazeikiu Nafta from Yukos International UK BV for $1.492 billion and a 30.66% stake from the Lithuanian government for $852 million.

The acquisition will raise PKN Orlen's net debt-to-EBITDA ratio to between 2.5x and 3x by the end of 2007 from a low of 0.5x at the end of September, the agency predicted. The downgrade by only one notch reflects the commitment by PKN Orlen's management to deleverage to a targeted net debt-to-EBITDA ratio of 1.5x.

Although the Mazeikiu Nafta acquisition may make strategic sense for PKN Orlen through increased geographic diversification and larger scale, Fitch said it also poses a number of risks, including increased crude oil supply risk, as evidenced by the current pipeline delivery interruption to Mazeikiu Nafta from Russia. In addition, Mazeikiu Nafta's refinery has a less favorable location than PKN Orlen's main refinery in Plock, is exposed to greater competition and generates lower refining margins due to its lower white product yield.

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