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Moody's downgrades Brunswick Rail's ratings to Caa3 from B3; negative outlook

June 5, 2015 Moody's Investors Service
London, 05 June 2015 -- Moody's Investors Service (Moody's) has today downgraded Brunswick Rail Limited's (BRL) corporate family rating (CFR) to Caa3 from B3 and probability of default rating (PDR) to Caa3-PD from B3-PD. Moody's has also downgraded to Caa3 from B3 the senior unsecured rating on the $600 million notes issued by Brunswick Rail Finance Limited and guaranteed by BRL and its key operating subsidiaries (Notes). The outlook on all the ratings is negative.


Today's downgrade reflects Moody's assessment of the substantially increased probability of the company defaulting on its debt over the medium term and weakened recovery prospects for the holders of the Notes.

In the first quarter of 2015, BRL's debt/EBITDA increased to 5.7x and EBIT/interest declined to 1.2x from 4.9x and 1.4x, respectively, as of year-end 2014 (all metrics are Moody's-adjusted). Moody's expects that BRL's financial metrics will continue deteriorating, with leverage growing materially above 6.0x adjusted debt/EBITDA and adjusted EBIT/interest declining below 1.2x which were the thresholds for the company's B3 rating. This deterioration will be driven by a severe decline in EBITDA (which is reported in US dollars), as a result of a depreciated rouble, ongoing weak market environment, significant pricing pressure on the company's operating lease contracts, delinking of most of lease contracts from US dollar and deterioration in customer payment discipline.

The expected deterioration in financial metrics will lead to a breach of a financial covenant under BRL's RUB4 billion outstanding syndicated bank loan when tested as of June 2015. If the company does not succeed in obtaining a waiver or resetting the covenant by that time, Moody's expects that it will prepay the loan to avoid a cross-default under the Notes. Although BRL's accumulated cash should probably be sufficient to prepay the loan, its liquidity will materially weaken as a result, with
uncertainty over whether BRL's reduced operating cash inflows will be sufficient to pay future semi-annual coupon on the Notes.

In addition to the expected deterioration in financial metrics, the substantial weakening of liquidity and the sharp increase in the probability of default, BRL's Caa3 CFR reflects (1) the company'ssignificant foreign currency risk, as nearly 90% of BRL's debt as of March 2015 was denominated in US dollars, while the share of its revenues
linked to the US dollar (estimated at below 40% as of the same date) is likely to continue declining; (2) the challenging macroeconomic environment and deterioration in customer payment discipline; (3) the severe deterioration of conditions in the very competitive Russian market of operating leasing of freight railcars and BRL's single-countryconcentration; (5) the substantial amount of the company's railcars that require remarketing over the next 12-18 months; (6) customer concentration, with more than half of revenues received from the company's six largest customers in the first quarter of 2015; and (7) the high risk of default on the Notes, with limited prospects of shareholder support.

BRL's rating also takes into account (1) the company's modern railcar fleet, with an average age of only five years, which requires low maintenance capex; (2) its established transportation business, which should be able to accommodate part of the company's railcars if there is low demand for operating leases, although that business is less marginal and exposed to depressed spot market conditions; (3) the average remaining lease tenor of BRL's operating lease contracts of nearly three
years, although this does not protect the company from market volatility and price risk; and (4) the estimated value of its unencumbered railcar fleet of more than $600 million (as of March 2015), although any distressed sale of railcars in a weak market would require a significant discount.


The negative outlook for BRL's ratings reflects (1) the high risk that the company's liquidity will deteriorate as a result of reduced operating cash flows and the likely need to use most of its accumulated cash to prepay a large syndicated loan because of the imminent covenant breach; and (2) the increasing default risk related to the Notes.


An upgrade to the ratings in the next 12-18 months is unlikely. However, Moody's could consider a positive rating action in the event that (1) BRL improves its liquidity to mitigate future refinancing risks; and (2) there is a sustainable recovery in the freight railcar operating lease market (although not expected over the next 12-18 months).

Moody's would consider downgrading the ratings in the event that (1) BRL fails to generate operating cash flows sufficient to service its debt; or (2) BRL's assets value deteriorates which, coupled with heightened default probability, would lower recovery prospects for debt holders.
Company — Brunswick Rail Ltd
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    Brunswick Rail Ltd
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