Fitch Affirms Ventrelt at 'BB-'; Outlook Stable
October 9, 2012 Fitch Ratings
Fitch Ratings-Moscow/London-09 October 2012: Fitch Ratings has affirmed Ventrelt Holdings Ltd's (Ventrelt or the group) Long-term foreign currency Issuer Default Rating (IDR) at 'BB-' with Stable Outlook. Fitch has also affirmed the senior unsecured rating of RVK-Finance LLC's RUB3bn bonds at 'BB-'. A full list of rating actions is at the end of this release.
The ratings of Ventrelt, a leading Russian private water and wastewater operator, reflect the company's long-term concession agreements with municipalities to provide essential infrastructure services, its moderate leverage and existing funding structure. Ventrelt operates under the name of Rosvodokanal and serves over six million customers in several large cities in Russia and one in Ukraine. Ventrelt's ratings are constrained by its limited size and diversification relative to larger peers and 'BB' rated Russian companies, as well as the existing regulatory framework in the Russian Federation pertaining to concession agreements and tariff setting.
In 2011, Ventrelt reported revenues of RUB14.3bn, a 9.6% increase yoy mainly due to higher water and wastewater tariffs. The group's net debt/EBITDA in 2011 decreased to 1.5x from 1.7x at end-2010. To better capture operational performance, Fitch calculates net debt/connection fee adjusted EBITDA, which decreased to 2.6x at end-2011 (deducting connection fees, the capital element included in EBITDA). This ratio is expected to remain below 4x in the medium term. EBITDA-based gross interest cover amounted to 4.4x at end-2011. Fitch expects that interest cover will remain comfortably above 3x at the current rating level. The agency believes that Ventrelt's capex will be contained at levels commensurate with available cash flows and long-term borrowings.
At end-2011 Ventrelt's short-term debt maturities were RUB2bn, including the RUB1.4bn EBRD loan due in 2021. The company reclassified the EBRD loan as short-term as one of the borrowers, Kaluzhskiy Oblastnoy Vodokanal LLC, breached a loan covenant at end-2011. In March 2012, Ventrelt received a waiver from EBRD with respect to this covenant breach. Therefore, Fitch treats this EBRD loan as long-term in its liquidity analysis at end-2011. The group's remaining short-term borrowings of RUB600m compared well with cash and cash equivalents of RUB1.1bn at that date.
The RUB3bn bonds issued by RVK-Finance LLC benefit from sureties provided on a joint and several basis by several group's subsidiaries including Kaluzhsky Oblastnoy Vodokanal LLC. In March 2012, Ventrelt sold its 100% stake in Kaluzhsky Oblastnoy Vodokanal LLC and agreed with the buyer that its surety will remain in place until 2015. In turn, Barnaulskiy Vodokanal LLC, a fully-owned group subsidiary, issued a surety to Kaluzhsky Oblastnoy Vodokanal LLC covering all potential obligations.
Fitch considers Ventrelt's refinancing risk as acceptable due to its moderate gearing and the implicit support from a number of Russian banks, including OJSC Alfa-Bank ('BBB-'/Stable), an entity under common control with the group, and state-controlled banks that Fitch expects to participate in municipality-related financings. Ventrelt's RUB3bn bonds maturing in 2015 have a put option in November 2013. In its rating case, Fitch assumes that bonds will be put by bondholders in 2013 and that Ventrelt will be able to refinance the bonds.
In March, Ventrelt signed a 30-year concession agreement in the city of Voronezh. While Fitch views the group changes as positive, Ventrelt needs to demonstrate that it can effectively manage the newly consolidated assets and can maintain and improve its overall performance, profitability and working capital management.
Water and sewage tariffs in Russian cities are negotiated annually between a water utility and a local tariff regulator. Tariffs represent a cost-plus mechanism and cover operating expenditure (opex) and planned capex. The changes in concession legislation introduced in 2010 provide for long-term tariffs that should increase earnings visibility in the sector and improve the legal status and protection of concessionaires. Fitch expects long-term water tariffs to be implemented from 2014. On the other hand, Russian officials are committed to cap annual utility tariff increases at below 15%, ie, in line with the annual indexation of domestic natural gas prices. Furthermore, from 2012, annual utility tariff increases take place on 1 July and 1 September instead of 1 January, thus reducing revenue growth for all utility companies in Russia.
WHAT COULD TRIGGER A RATING ACTION
Positive: future developments that may, individually or collectively, lead to a positive rating action include:
- Increased revenue and earnings visibility following the implementation of long-term tariffs could lead to a positive rating action.
- An acquisition-driven increase in Ventrelt's business without deterioration of credit metrics would be positive for the rating.
- Improved cash collection.
Negative: future developments that may, individually or collectively, lead to a negative rating action include:
- An increase in leverage above 4x net debt/connection-fee adjusted EBITDA and/or weakening of EBITDA-based interest cover below 3x to fund additional capital expenditure or acquisitions may lead to a negative rating action.
- A sustained reduction in cash generation through a worsening operating performance or deteriorating cash collection may lead to a negative rating action.
The rating actions are as follows:
Ventrelt Holdings Ltd.
Long-term foreign currency IDR: affirmed at 'BB-'; Stable Outlook
Long-term local currency IDR: affirmed at 'BB-'; Stable Outlook
National Long-term rating: affirmed at 'A+(rus)'; Stable Outlook
RVK-Finance LLC (wholly-owned indirect subsidiary of Ventrelt Holdings Ltd)
Senior unsecured rating: affirmed at 'BB-'
Senior unsecured rating: affirmed at 'A+(rus)'
Issue — RVK-Finance, 03
Country of riskRussia
Redemption (put/call option)
М/S&P/F— / — / —
Company — RVK-Finance
Full nameRVK-Finance LLC