“The funds from operations and EBITDA are expected to remain under pressure in 2009 and 2010 due to the cyclical downturn in the oil refining sector, which has been exacerbated by a sharp contraction in global demand for refined products”, reads Fitch report.

The financial rating company cites the economic downturn in Romania as one of the factors likely to have negatively impacted Rompetrol’s operations in Romania. “Romania ('BB+'/negative), in which The Rompetrol Group generated about 75% of its 2008 EBITDA, is undergoing an economic downturn which is likely to negatively affect TRG's operations”, Fitch said.

The financial rating agency said the loan rating reflects the company's stand-alone credit profile as well as the moderate support from its Kazakhstan-based integrated oil and gas parent, KazMunaiGaz from Kazakhstan.

“Fitch assesses strategic and operational ties between TRG and KazMunaigaz as strong, while legal ties are weak as KazMunaiGaz does not guarantee TRG's debt”, report shows.

However Fitch reminds that both KazMunaiGaz and Rompetrol Holding S.A. controlled by Dinu Patriciu have provided tangible support to The Rompetrol Group in the form of subordinated shareholder loans (684million dollars of which 446 mln dollars was lent in 2008) and favorable payment terms for crude oil supplies from KazMunaiGaz.

TRG reported negative funds from operations of 158 million dollars in 2008. Funds from operations adjusted for non-recurring inventory holding losses, due to a fall in the oil price in second half 2008, amounted to a negative 60 million dollars.

“This indicates the company was not able to cover interest expense from its operating cash flow before working capital due to the high debt burden of 1.5 billion dollars, including 769 million dollars of bank loans and 646 million dollars of shareholder loans”, Fitch said.

However, the financial rating agency expects TRG to improve its free cash flow in 2009, as the group's capex plan for this year is 90 million dollars, substantially lower than 358 million dollars spent in 2008. TRG's management has also implemented a cost reduction program related to selling, and general and administration costs, including salaries.

These measures should allow the group to be broadly free cash flow neutral. However, TRG's financial leverage is expected to remain stretched unless its capital structure is improved, “for example by cash injections from shareholders”.

The negative outlook reflects high refinancing risk as the company's available liquidity in the form of cash and undrawn committed facilities is insufficient to cover TRG's short-term debt of 706 million dollars (at end-March 2009), primarily comprising working capital bank loans.

“This leaves the company dependent on the renewal of its existing bank facilities amid difficult credit market conditions, and/or on additional shareholder loans to fund its obligations”, report shows.

The Rompetrol Group plans to refinance a major part of its short-term debt with a 1 billion dollar syndicated bank facility which is currently planned for the second half of 2009. An extension of TRG's debt maturity profile would be viewed positively by Fitch.

The group's leverage ratio is high compared with other refining companies rated by Fitch.