Moody's assigns Baa1 rating to Russian Railways' domestic bonds.
Moody's Investors Service has today assigned a Baa1 rating with a stable outlook to the following outstanding issuances of RUB-denominated domestic bonds by Russian Railways JSC (Baa1 stable):
Series 07 of RUB5 billion initial face value due in November 2012
Series 09 of RUB15 billion initial face value due in November 2013
Series 10 of RUB15 billion initial face value due in March 2014
Series 11 of RUB15 billion initial face value due in November 2015
Series 12 of RUB15 billion initial face value due in May 2019
Series 13 of RUB15 billion initial face value due in March 2014
Series 14 of RUB15 billion initial face value due in April 2015
Series 15 of RUB15 billion initial face value due in June 2016
Series 16 of RUB15 billion initial face value due in June 2017
Series 17 of RUB15 billion initial face value due in July 2018
Series 18 of RUB15 billion initial face value due in July 2019
Series 19 of RUB10 billion initial face value due in July 2024
Series 23 of RUB15 billion initial face value due in January 2025
Series BO-01 of RUB15 billion initial face value due in December 2012
The Baa1 rating assigned to the bonds is equivalent to the senior unsecured issuer rating of Russian Railways and its other outstanding senior unsecured debt instruments rated by Moody's. The Baa1 rating reflects Moody's assumption that the bonds rank pari passu with Russian Railways' other unsecured and unsubordinated financial indebtedness (apart from any obligations mandatorily preferred by law).
As Russian Railways is a 100% state-owned company, Moody's applies its rating methodology for government-related issuers (GRIs) in determining the company's issuer rating. According to this methodology, the rating is driven by a combination of (i) Russian Railways' baseline credit assessment (BCA) of 10 (mapping to Baa3); (ii) the Baa1 local currency rating of the Russian government; (iii) the high default dependence between the company and the government; and (iv) the high probability of state support in the event of financial distress.
Russian Railways' BCA factors in (i) its strategic importance to the domestic economy and close link with the government; (ii) its status as the monopoly owner and provider of rail infrastructure services in Russia and its leadership in the domestic railway sector; (iii) measures introduced by the government to support the company's operations in weak economic conditions; (iv) management's successful efforts to manage Russian Railways' financial profile and liquidity during the recent crisis; and (v) management's commitment to a rather conservative financial policy, including maintaining an unadjusted net debt/EBITDA ratio of less than 2.0x.
However, the BCA remains constrained by the risks surrounding the evolution of Russian Railways' credit profile in the medium and longer term, given the company's (i) exposure to Russia's commoditised economy;
(ii) substantial investment needs; and (iii) dependence on the government's ability and willingness to maintain a tight link between Russian Railways' investments, tariff decisions and additional compensatory instruments.
The stable outlook incorporates Moody's expectation that (i) the Russian government will continue to support Russian Railways; and (ii) the company will maintain debt/EBITDA and EBITA/interest coverage ratios of less than 2.5x and more than 3.0x, respectively, on a consolidated adjusted basis.
WHAT COULD CHANGE THE RATING UP/DOWN
Upward pressure on Russian Railways' ratings is unlikely at present, given that the company's rating is at par with the rating of the Russian government. However, Moody's would consider raising Russian Railways' BCA over the next 12-18 months provided that (i) the economic situation in Russia and conditions in the freight transportation market prove to be stable; (ii) the government's decisions on tariffs and subsidies for 2013 remain supportive for Russian Railways; and (iii) the company is able to keep its consolidated adjusted total debt/EBITDA below 2.0x on a sustainable basis, while maintaining strong liquidity.
Moody's would consider downgrading Russian Railways' ratings if its standalone credit quality (BCA) deteriorates materially, driven by a reduction in government support or by a significant weakening of the rail transportation market, such that the company's (i) cash flow generation ability is reduced; (ii) leverage, measured as consolidated adjusted total debt/EBITDA, exceeds 2.5x; and (iii) interest coverage falls below 3.0x on a sustainable basis. Downward pressure could also be exerted on the ratings if the company's liquidity position becomes materially weakened. In addition, Russian Railways' ratings would be downgraded if the rating agency were to (i) downgrade the rating of the Russian government; or (ii) review downwards its assessment of the probability of the government providing extraordinary support to the company in the event of a financial distress.
Russian Railways is the 100%-state-owned monopoly owner and operator of Russia's rail infrastructure and provider of freight and passenger rail transportation services. At end-2010, the group had approximately 1.2 million employees. Russian Railways reported revenue of RUB1.334 billion
(USD43.8 billion) in 2010, with cargo transportation services accounting for around 75% of that revenue.
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