Moody's cuts Yukos ratings

Moody's Investors Service said it downgraded the senior implied and issuer ratings of Yukos Oil Co. to B1 and B2, respectively, from Ba1 and Ba2, following last week's court ruling freezing its assets at the request of the tax authorities who are claiming $3.5 billion in unpaid taxes from the company.

Moody's said that this ruling results in considerable additional financial pressure on the company.

The rating agency is keeping the ratings under review for possible further downgrade.

Last Thursday the Moscow Arbitration Court ruled that Yukos may not sell or mortgage its assets including shares until there is a decision on the tax claim. While the ruling will not impact Yukos's fundamental operations, it constrains the company's flexibility to take options to meet the demand of the Ministry of Taxes and Duties.

In particular, should Yukos be required to make the $3.5 billion payment in the near term, it will likely encounter liquidity problems as it has insufficient cash on hand and very restricted ability to borrow.

Moody's points out, however, that Yukos continues to generate large cash flows and coverage relative to its debt position. For these reasons, even if the company were forced into insolvency, Moody's believes that creditors would likely remain protected and achieve full recovery.

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