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Moody's affirms IDGC Holding's Ba1 rating with developing outlook

November 29, 2012 Moody's Investors Service
London, 29 November 2012 -- Moody's Investors Service has today affirmed
the Ba1 corporate family rating (CFR) and probability of default rating
(PDR) of JSC IDGC Holding (IDGC Holding), the holding company for a few
major interregional and regional distribution grid businesses in Russia,
with a developing outlook. This follows the publication of a Decree on
OJSC Russian Grids (Russian Grids) from the president of Russia on 22
November 2012.



RATINGS RATIONALE

Today's rating action considers the new restructuring plan for the
Russian grid sector, which was initiated by Presidential Decree and may
entail a range of potential outcomes and ramifications for IDGC Holding's
creditworthiness. The outlook also factors in significant execution risks
associated with the plan.



Given the government's 54.52% stake in IDGC Holding, Moody's considers it
a government-related issuer (GRI) under its rating methodology for GRIs.
IDGC Holding's CFR continues to incorporate a two-notch uplift to the
company's baseline credit assessment (BCA) -- a measure of its standalone
credit quality -- of ba3, given Moody's current assessment of "high"
default dependence between the company and the Russian government and
"strong" probability of extraordinary state support for the company in a
distress situation. The rating also incorporates the Baa1 local-currency
rating of the Russian government.



In May 2012, Moody's affirmed the company's Ba1 ratings and changed the
rating outlook to developing from stable, following the announcement of a
plan to transfer the powers of the sole executive body of IDGC Holding to
FGC UES (FGC), the Russian transmission grid business. The developing
outlook reflected uncertainty surrounding the government's strategy for
the development of the grid sector in Russia, particularly the strategic
direction of IDGC Holding. Moody's noted that there was limited
information on the impact that the transfer of IDGC Holding's executive
powers to FGC would have on IDGC Holding. The transfer was executed in
June 2012.



In accordance with the recently published Presidential Decree, the grid
sector is now to be consolidated on the basis of IDGC Holding. The
government will transform IDGC Holding, which will be renamed Russian
Grids, into a management company for distribution grid businesses and
FGC's transmission grid business. The management company will direct the
development of the domestic grid sector to increase the quality and
reliability of services, control costs and interlink investments in
transmission and distribution grids. The government will exchange its
stake in FGC with the management company for newly issued shares. The
government's direct ownership of FGC will be replaced by an indirect
ownership structure, with effective control of at least 50% plus one
share required. Moody's regards this action as the government distancing
itself from FGC and has downgraded FGC's issuer rating to Baa3 from Baa2;
the outlook is stable. Moody's expects that the implementation of these
corporate changes is likely to result in the government's ownership of
IDGC Holding, or Russian Grids, of more than 75%.



WHAT COULD CHANGE THE RATING UP/DOWN



Positive momentum for IDGC Holding's Ba1 CFR could emerge if there were
clear signs that, under the new restructuring plan, the expected increase
of the government's ownership of IDGC Holding would translate into the
latter's increasing responsibilities over the whole grid sector's
management accompanied by a strengthening business and financial profile
for its group and increasing access to the state's support.



Conversely, downward rating pressure could develop if there were (1)
uncertainties regarding, or clear limitations to, the holding's new role
and responsibilities as the management company for the whole grid sector;
(2) signs of weakening support from the government for the holding, with
major support allocated to FGC and privatisation plans on stronger
distribution grid subsidiaries adopted; (3) a negative shift in the
developing regulatory regime for electric utilities in Russia; or (4)
deterioration in the company's financial performance, evidenced, for
example, by a funds from operations (FFO)/interest coverage ratio and
FFO/net debt ratio trending below 3.0x and 20%, respectively. In
addition, IDGC Holding's inability to address refinancing issues and/or
challenged covenants in a timely manner could negatively affect its
ratings.



PRINCIPAL METHODOLOGIES

The methodologies used in this rating were Regulated Electric and Gas
Networks published in August 2009, and Government-Related Issuers:
Methodology Update published in July 2010. Please see the Credit Policy
page on www.moodys.com for a copy of these methodologies.

Headquartered in the city of Moscow, IDGC Holding is the holding company
for 14 core operating subsidiaries, which are regulated monopoly
distribution grid businesses operating in 69 regions of Russia. In 2011,
the group's consolidated revenue amounted to RUB634.6 billion (USD21.6
billion). A 54.52% stake in IDGC Holding is owned by the Russian
government.
Company — Rosseti
  • Full name
    Rosseti PJSC
  • Registration country
    Russia
  • Industry
    Power