Moody's rates PKN Orlen notes Baa3

Moody's Investors Service said it assigned a Baa3 corporate family rating to Polski Koncern Naftowy Orlen Spólka Akcyjna (PKN Orlen) and a provisional Baa3 rating to the proposed up to €1 billion of senior unsecured notes to be issued by Aktiebolaget Grundstenen 108770, a Orlen subsidiary that is in the process of changing its name to Orlen Finance AB.

The outlook is stable.

The agency said the Baa3 corporate family rating reflects PKN Orlen's strong position in the refining and petrochemical industry within central Eastern Europe; its dominant position in Poland with 70% of refining capacity, 30% market share in retail and solid infrastructure assets; a moderate likelihood of support from the Polish government, which owns a 27.% stake in the company; PKN Orlen's good size; and its diversification through several debt-financed acquisitions.

The acquisitions have, however, elevated year-end 2006 adjusted debt to 10.5 billion zloty from 4.5 billion zloty, thus weakening the company's overall financial profile. Moody's said improving cash flows will likely help reduce leverage over the next two to three years, but the agency cautioned that PKN Orlen will need to execute "flawlessly" over the next two years if it is to achieve its net debt-to-EBITDA target ratio of 1.5x to 2x.

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