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Fitch Affirms JSC Russian Railways at ‘BBB+’; Outlook Stable

January 16, 2008 | Cbonds

Fitch Ratings has today affirmed Joint Stock Company Russian Railways’s (RZD) Long-term foreign and local currency Issuer Default ratings (IDRs) and foreign and local currency senior unsecured ratings at ‘BBB+’, and Short-term foreign and local currency ratings at ‘F2’. The Long-term IDR Outlooks remain Stable. Its National Long-term rating is affirmed at ‘AAA(rus)’ with a Stable Outlook.

The ratings reflect RZD’s continued close connections with the Russian Federation (rated ‘BBB+’/Stable), the strategic importance of rail infrastructure in Russia, which accounts for approximately 3.6% of Russian GDP, and the standalone financial profile of the group. Although the Russian Federation does not explicitly guarantee RZD’s debt, it owns 100% of the company and has representation on the board, which approves the budget and capital expenditure of the group.

RZD’s collective freight activities (FYE06 operating profit RUR242.7bn or USD10bn) encompassing oil, coal, ores and grain are increasingly profitable whereas its passenger services remain loss-making (FYE06 operating loss RUR22.5bn or USD926m), albeit at a smaller loss than in the prior year. The cross subsidy of passenger service operating losses by freight will reduce to some extent, following the receipt of compensation from the government, which commenced during 2007.

RZD’s process of reform is continuing, with recent progress focussing on increasing domestic competition within freight activities. RZD’s domestic and international transport tariffs are set by the Federal Tariff Service department on a cost-plus basis and are split, on average, into 50% infrastructure, 15% wagons and 35% locomotives. Consequently, with independent freight operators not owning locomotives or infrastructure, increased competition will only expose 15% of RZD’s turnover to competitive forces. The third stage of the reform (creating a well developed competitive market for rail transportation services) is not expected to be completed before 2010 but even then the core infrastructure will remain with RZD, which will be expected to remain a dominant force in the railway sector for locomotive and wagon services.

While RZD’s leverage will increase from the capital expenditure demands through to 2010, Fitch expects it to remain an under-leveraged company (FYE06 net debt/EBITDA of 0.4x) relative to its debt-laden European peers. This stand-alone credit profile helps underpin the ratings of the group.

Company: RZD

Full company nameRussian Railways
Country of riskRussia
Country of registrationRussia


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