Moody’s Investors Service has today affirmed the Baa1 senior unsecured issuer rating of Russian Railways Joint Stock Company, and the Baa1 senior unsecured rating of RZD Capital PLC, which is the issuer of loan participation notes for the sole purpose of financing loans to Russian Railways.
The components of Russian Railways’ senior unsecured issuer rating based on Moody’s designation of the company as a government-related issuer (GRI), namely Russian Railways’ baseline credit assessment (BCA) — which is a measure of standalone financial strength — of baa3, ‘high’ dependence and ‘high’ implied state support, remain unchanged. The outlook on all ratings remains stable.
Today’s affirmation of Russian Railways’ Baa1 senior unsecured issuer rating reflects the solid positioning of the company’s BCA, on the back of (1) its historically robust business and financial profiles; (2) Moody’s expectation that Russian Railways will maintain its solid financial metrics, with only a moderate increase in its leverage, despite the weakened market environment and the government freeze on regulated tariffs for 2014; (3) anticipated improvements in the company’s operating environment, as a result of the adoption of the long-term tariff indexation mechanism (to be implemented from 2015); and (4) the company’s long-term debt maturity profile, low refinancing risks and strong liquidity.
The rating agency expects that Russian Railways will continue to benefit from extensive support from the Russian government, which is another critical factor to the company’s ratings. This view is supported by the Russian government’s track record of providing support to Russian Railways in various forms over the years (including 2014, for which the government introduced the freeze on tariffs of natural monopolies, including Russian Railways).
Russian Railways is strongly positioned in its baa3 BCA, which reflects (1) its status as the monopoly owner and provider of rail infrastructure services, along with virtually all locomotive traction services in Russia; (2) its critical importance to the domestic economy and close link with the government; (3) continuing support from the government in the form of subsidies, equity injections, long-term low interest-rate financing (infrastructure bonds), low dividend requirements and the long-term tariff indexation mechanism to be introduced from 2015; (4) the company’s conservative financial policy, which includes the maintenance of reported net debt/EBITDA below 2.5x and the share of short-term debt below 15% of total; (5) its RUB184 billion ($5.3 billion) two-year cost-cutting programme, which it implemented in 2013 in response to deteriorated market conditions; and (6) its long-term debt maturity profile, low refinancing risks and strong liquidity.
The BCA also factors in (1) the company’s vulnerability to a slowdown in Russia’s GDP growth; (2) Moody’s expectation of an increase in Russian Railways’ leverage to 2.5x-2.6x adjusted debt/EBITDA, as a result of a decline in cargo transportation volumes in Russia in 2013 and the freezing of the company’s regulated tariff for 2014, which will constrain its earnings at a time when the company is implementing a large investment programme that is substantially debt-financed; (3) the company’s continuing dependence on the government’s willingness to maintain the scope of its support at a level sufficient for Russian Railways to maintain its financial metrics in line with its conservative financial policy; and (4) its exposure to an emerging market operating environment with a less developed regulatory, political and legal framework.
RATIONALE FOR STABLE OUTLOOK
The stable outlook on the ratings reflects (1) the stable outlook on the Russian government’s own rating, and a continuing high likelihood that the government would support Russian Railways if required; and (2) the company’s resilient and solidly positioned BCA.
WHAT COULD CHANGE THE RATING UP/DOWN
Upward pressure on Russian Railways’ senior unsecured issuer rating is unlikely at present, given that it is on a par with the rating of the Russian government. However, Moody’s could consider raising Russian Railways’ BCA provided that (1) there is no material deterioration in the economic situation in Russia and conditions in the freight rail transportation market; (2) the company maintains its currently strong financial metrics and solid liquidity; and (3) the government’s decisions on tariffs, subsidies, equity injections and dividend requirements prove consistently supportive for the company’s operations and extensive capital investment programme, and deliver sustainability as well as greater visibility that the operations and capital programme can be delivered without materially weakening those metrics.
Conversely, Moody’s would downgrade Russian Railways’ senior unsecured issuer rating if it were to (1) downgrade the rating of the Russian government; or (2) revise downwards its assessment of the probability of the government providing extraordinary support to the company in the event of financial distress. In addition, Moody’s could lower Russian Railways’ BCA if its consolidated adjusted debt/EBITDA were to exceed 3.5x on a sustained basis, or if its liquidity were to deteriorate materially. A one-notch lowering of the company’s BCA would not necessarily trigger a downgrade of the rating, provided that all the other GRI inputs remain unchanged.