S&P: JSC Freight One Assigned 'BBB-' Foreign And Local Currency Long-Term Corporate Credit Ratings; Outlook Stable
October 7, 2010 Standard & Poor's
LONDON (Standard & Poor's) Oct. 7, 2010--Standard & Poor's Ratings Services said today that it assigned its 'BBB-' long-term and 'A-3' short-term corporate credit ratings, and its 'ruAA+' Russia national scale rating to Russian rail freight operator JSC Freight One (Freight One). The outlook is stable.
The 'BBB-' ratings on Freight One are based on the company's stand-alone credit profile (SACP), which we assess at 'bbb-', as well as on our opinion that there is a "low" likelihood that the government of the Russian Federation (foreign currency BBB/Stable/A-3; local currency BBB+/Stable/A-2) would provide timely and sufficient extraordinary support to Freight One in the event of financial distress. Freight One is currently a 100% subsidiary of Russian Railways, which we consider to have an "extremely high" likelihood of extraordinary government support.
"The SACP reflects Freight One's fair business risk profile, which is based on our view of the company's strong competitive position in the Russian rail freight market, well-diversified customer base, and extensive area of operations," said Standard & Poor's credit analyst James Hoskins.
"These strengths are partially offset by our view of Freight One's modest financial risk profile; the uncertainty created by ongoing market liberalization; revenue volatility associated with the rail freight business; and the significant capital expenditure (capex) required to renew the company's fleet of rolling stock."
In accordance with our criteria for government-related entities, our view of a "low" likelihood of direct government support is based on our assessment of Freight One's:
• "Limited importance" for the Russian economy, due to our view that, while freight rail services are important to the Russian economy, Freight One operates in an increasingly competitive market and, once fully established, Freight Two (a recently created rail freight operator that is also a wholly owned subsidiary of Russian Railways) could likely provide a viable alternative should Freight One fail.
• "Limited" link with the government because although Freight One is 100% owned by the Russian Federation, Freight One's strategic direction is determined by Russian Railways rather than directly by the government. We also understand that there is a possibility that Freight One may be privatized in the near future.
In our view, Freight One will maintain its stated policy of leverage no higher than 1.0x to 1.5x debt to EBITDA, and cash flow from operations will continue to provide the majority of funding for capital investments. We could lower the ratings if debt were to increase beyond the expected levels, for example as a result of further large debt-funded acquisitions, or if discretionary cash flow were to remain significantly negative for more than two years. We could also lower the ratings if Freight One were privatized and the new owners were to adopt more aggressive financial policies, or if further market liberalization were to weaken Freight One's competitive position.
Given the company's large capital investment program, there is limited scope for us to raise the ratings while significant funding requirements remain.
Company — Freight One
Full nameJSC Freight One