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Moody's assigns Baa3 to Vodokanal Finance's RUB2 billion guaranteed bond (Russia)

December 2, 2010 Moody's Investors Service
Moscow, December 02, 2010 -- Moody's Investors Service has today assigned
a Baa3 global scale rating to the RUB2 billion senior unsecured bond of
OOO Vodokanal Finance, a wholly owned vehicle of the state unitary
enterprise (SUE) Vodokanal of St. Petersburg (Baa3, stable). This
five-year bond is guaranteed by SUE Vodokanal. The rating outlook is


The rating of the bond is based on an explicit, irrevocable and
unconditional guarantee provided by SUE Vodokanal and is equivalent to
its issuer rating of Baa3. The guarantee clearly points to SUE
Vodokanal's commitment to cover both principal and coupon payments on a
timely basis. The guarantee and the whole transaction are approved by the
City of St Petersburg (Baa2, stable), which is the sole founder and owner
of SUE Vodokanal and its assets.

Moody's understands that OOO Vodokanal Finance is created with the sole
purpose of raising finance for SUE Vodokanal's infrastructure projects,
including a sewerage project being implementing by the company on behalf
of the City of St Petersburg. SUE Vodokanal will pay semi-annual
installments to OOO Vodokanal Finance for the benefits of the
bondholders. Moody's notes that OOO Vodokanal Finance is directly managed
by SUE Vodokanal, which, in turn, works under the city's close

The Baa3 global scale foreign and local currency issuer ratings of SUE
Vodokanal of St Petersburg reflect the company's monopoly in the water
supply and sewerage business of the City of St Petersburg, its
diversified customer base and good overall efficiency of its operations
in the context of the sector. As the City of St Petersburg is the sole
owner of SUE Vodokanal, the company benefits from the city's commitment
to and a track record of supporting the company both directly and
indirectly. Moody's also notes that the company's debt after the issuance
remains moderate and appropriate for the rating category.

At the same time, SUE Vodokanal's ratings are constrained by politically
sensitive tariff regulation that limits the company's cash flow
generation ability. Moody's notes that the company's margins have been
volatile over past few years due to growing operating costs, particularly
depreciation. The recent recession in national and local economies also
put adverse (although not critical) pressure on the company's revenue.

The last rating action on Vodokanal of St. Petersburg was implemented on
24 January 2007, when Moody's assigned global scale foreign and local
currency ratings of Baa3. At the same time, Moody's Interfax Rating
Agency, which is majority-owned by Moody's, had assigned a Aaa.ru
national scale credit rating to the company.

The principal methodology used in this rating was Government-Related
Issuers: Methodology Update published in July 2010.

SUE Vodokanal has a natural monopoly in the water supply and sewerage
business of the City of St Petersburg, which is Russia's second-largest
city. SUE Vodokanal operates in an area exceeding 150,000 hectares with
a population of more than 4.6 million people.

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