Fitch Affirms JSC Russian Railways at 'BBB'; Outlook Stable
February 7, 2013 Fitch Ratings
Fitch Ratings-London/Moscow-06 February 2013: Fitch Ratings has affirmed JSC Russian Railways' (RZD) Long-term foreign currency Issuer Default Rating (IDR) at 'BBB' with a Stable Outlook. Fitch has also affirmed RZD Capital P.L.C.'s foreign currency senior unsecured rating at 'BBB'. A full list of rating actions is provided at the end of this release.
- Ratings Aligned with Sovereign
RZD's ratings are aligned with those of the Russian Federation ('BBB'/Stable), given its 100% state ownership and strategic importance to the Russian economy. RZD's ratings reflect the strong links between the state and the company, including the annual tariff and capex approval by the federal government, the provision of federal and regional subsidies for passenger and freight transportation, direct equity injections to fund RZD's capex. Fitch assesses RZD's standalone creditworthiness in the mid-'BBB' category. This is driven by RZD's position as the monopoly owner and operator of the rail infrastructure essential for transporting freight and passengers across Russia and abroad. RZD's standalone profile is limited by the absence of long-term tariffs, its exposure to commodities market risks, lack of geographical diversification and dependence on monetary state support. Fitch does not expect long-term tariffs to be implemented until 2014.
- Privatisation Rating Neutral
Pilot privatisation of a newly issued 5% stake in RZD's share capital in 2013 by state controlled funds is currently being discussed, providing state support to RZD and allowing the test of the privatization mechanisms. Fitch notes that RZD's partial privatisation - 25% less one share, with 75% plus one share to remain under state ownership - announced by the government in 2012 and not currently expected earlier than 2014-2016 is unlikely to change RZD's current ratings. Nonetheless, the agency notes that following the partial privatisation the company may have to develop alternative forms of government support for funding part of its capex programme previously funded through direct equity injections.
- State Pension Funds Funding
Starting from 2013 infrastructure projects with a significant payback period will be partially financed by state-owned funds via infrastructure bonds issued by RZD with matching maturities. The bonds will be CPI-linked, with a low margin and a maturity of up to 30 years. RZD expects to receive up to RUB100bn in the form of proceeds from infrastructure bonds annually during 2013-2015. Proceeds are to be used for financing infrastructure and expanding railroad capacity. It is envisaged that starting 2014 payments of interest and principal under these infrastructure bonds will be covered by tariff indexation. Fitch views positively the funding of long-term projects with long-term infrastructure bonds, however, this may result in reducing or replacing other forms of state support or higher tariffs increases.
- Capex to Increase Leverage
At end-2011 RZD reported funds from operations (FFO) adjusted net leverage of 0.7x. Fitch expects RZD's massive RUB1.4trn consolidated capex programme in 2013-2015 to be partially debt funded. Therefore, the agency forecasts RZD's FFO adjusted net leverage at about 2x by end-2014.
- Strong Operations, Stabilised Margins
RZD's freight turnover reached 2.16trn tonne-km in 2012, up 1.3% yoy, or 2.78trn tonne-km including empty runs, up 2.9%. Over this period, RZD transported 1,272m tonnes of cargo, a 2.4% yoy increase. In H112, RZD reported consolidated revenue of RUB745bn, up 5% yoy, and EBITDA of RUB211bn, up 12.9% yoy. In H112 EBITDA margin slightly increased to 28% from 26% in H111.
- Subsidies, Capital Injections Continued
In 2012 RZD continued to receive subsidies for passenger transportation services and repair of railway infrastructure (about RUB77bn) and capital injections for infrastructure development, including the Winter Olympics, the Moscow rail junction and other projects (RUB104bn). In 2013 RZD expects to receive subsidies and an equity contribution. However, the amount of direct state support will decrease over time, as the main portion of direct capital injections have been devoted to the Winter Olympics projects completed in 2013. Direct state support is expected to be replaced by other instruments, such as the infrastructure bonds.
- Ongoing Disposals
In December 2012, RZD received proceeds for the remaining 25% share in JSC Freight One, raising RUB50bn. Together with other disposals, RZD generated about RUB76bn in proceeds in 2012. The funds have been earmarked for RZD's capital investment programme. RZD expects further disposals in 2013, however on a smaller scale of about RUB47bn.
- 'Take-or-Pay' Principle and Long-term Tariff for Investment Planning
In 2012 RZD, Vnesheconombank ('BBB'/Stable) and over 20 major Russian industrial companies signed an agreement on rail road infrastructure development, based on the 'take-or-pay' principle of cooperation between RZD and cargo owners. Under this principle, cargo owners are obliged to budget long-term cargo volumes and based on which RZD will define the required extension/upgrade of infrastructure capacity. This agreement and subsequent long-term forecasts from cargo owners have been used as the basis for the preparation of the company's investment programme until 2020 and five-year tariff planning. According to RZD the infrastructure development plan should not increase its capex plans for more than 5%. We believe that whist the capex planning process may be enhanced, RZD's volume risk exposure does not change significantly.
RATING SENSITIVITY ANALYSIS
Positive: Future developments that could lead to positive rating actions include:
- Economic growth, supporting rail transportation revenue growth that exceeds Fitch's expectations, would be positive for RZD's ratings. But at the current 'BBB' level, an upgrade of Russia's sovereign rating would be a pre-requisite for an upgrade of RZD's IDR.
Negative: Future developments that could lead to negative rating action include:
- Sustained leverage above 2.5x would put pressure on the ratings. Fitch expects to continue aligning RZD's IDR with Russia's at the 'BBB' level, given the strength of government links. Therefore, Fitch is unlikely to downgrade RZD before downgrading Russia first.
LIQUIDITY & DEBT STRUCTURE
- Adequate Liquidity, Manageable Maturities
RZD's non-consolidated cash and cash equivalents stood at RUB113bn at end-2012 which is sufficient to cover short-term debt maturities of about RUB68bn. However, expected negative free cash flow continues to add to funding requirements. RZD also had about RUB238bn of undrawn committed term loans mainly from a number of major Russian banks, including state-owned Sberbank of Russia ('BBB'/Stable) and JSC VTB Bank ('BBB'/Negative). Fitch believes that RZD will be able to draw funds from Russian banks, within approved limits, if and when needed. Fitch estimates that RZD will need to partly rely on new borrowings, including infrastructure bonds, to finance its capex programme. We view positively the decrease of short-term debt share to 22% at end-H112 from 40% at end-2011.
The rating actions are as follows:
Long-term foreign currency Issuer Default Rating (IDR) affirmed at 'BBB', Outlook Stable
Long-term local currency IDR affirmed at 'BBB', Outlook Stable
Long-term National Rating affirmed at 'AAA(rus)', Outlook Stable
Short-term foreign currency IDR affirmed at 'F3'
Short-term local currency IDR affirmed at 'F3'
Local currency senior unsecured affirmed at 'BBB'
National senior unsecured rating affirmed at 'AAA(rus)'
RZD Capital Limited's foreign currency senior unsecured rating affirmed at 'BBB'
Company — RZD
Full nameRussian Railways