Moody’s Investors Service has assigned a Baa2 senior unsecured issuer rating to Federal Passenger Company OJSC. The outlook on the rating is stable. This is the first time Moody’s has assigned a rating to Federal Passenger Company.
Federal Passenger Company’s Baa2 senior unsecured rating is driven by a combination of the company’s standalone credit strength and Moody’s assessment of implied support from the Russian government (Baa1 stable) and/or Russian Railways Joint Stock Company (Baa1 stable) in the event of financial distress. Federal Passenger Company has strong interlinkages with its parent, Russian Railways, therefore Moody’s standalone assessment of Federal Passenger Company is constrained at Baa3 by Russian Railways’ own baseline credit assessment (BCA) of baa3, which is the measure of the Russian Railways’ standalone credit quality based on Moody’s designation of the company as a government-related issuer (GRI). However, Federal Passenger Company’s final rating incorporates one notch of uplift to Baa2 reflecting the scope for extraordinary support if required. This uplift positions Federal Passenger Company’s rating just one notch below its parent which is consistent with the company’s role as a highly strategic and important subsidiary under the same effective management control.
Federal Passenger Company’s Baa2 senior unsecured issuer rating reflects (1) the company’s status as a virtual monopoly provider of long-distance passenger railway transportation services in Russia; (2) the company’s strategic and social importance to the Russian government as the country’s main mode of long-distance passenger transportation; (3) Moody’s expectation that the government will continue to provide Federal Passenger Company with subsidies to compensate for low level of its regulated tariffs; (4) Moody’s assessment of the strong probability of support to be provided to Federal Passenger Company by the Russian government or by its parent company, Russian Railways, in the event of financial distress; (5) the company’s conservative financial policy and strong financial metrics, which Moody’s expects to be sustainably maintained despite the anticipated increase in debt in order to finance capital expenditure (capex); (6) the company’s balanced debt maturity profile, with over 80% of its outstanding debt being unsecured; and (7) adequate liquidity and low foreign currency risk.
However, the rating also factors in (1) the lack of long-term visibility regarding Federal Passenger Company’s regulated tariffs and state subsidies; (2) the company’s dependence on Russian Railways’ willingness to maintain its strong financial metrics through the absence of any dividend requirements; (3) Moody’s expectation that Federal Passenger Company will generate negative free cash flow over the next 12-18 months as a result of substantial capex required to replace or renew its depleted railcars; (4) the potential for growing competition with airlines as low-cost carriers develop in Russia; (5) the pronounced seasonality of Federal Passenger Company’s operating cash flows; and (6) the company’s exposure to an emerging market operating environment with a less-developed regulatory, political and legal framework.
RATIONALE FOR STABLE OUTLOOK
The stable outlook on Federal Passenger Company’s rating reflects (1) the stable outlook on the ratings of both the Russian government and Russian Railways, given Moody’s expectation that they would continue to support the company if required; and (2) Moody’s expectation that the company will maintain its solid financial metrics and adequate liquidity.
WHAT COULD CHANGE THE RATING UP/DOWN
Federal Passenger Company’s rating could be upgraded if Moody’s were to upgrade Russian Railways’ rating, provided that (1) there is no material deterioration in the Russian economy or conditions in the passenger railway transportation market; (2) the government’s decisions on regulated tariffs and subsidies, as well as Russian Railways’ decisions on financial support (including equity injections and dividend requirements) prove consistently supportive for the company’s operations and capital investment programme; and (3) the company maintains solid financial metrics and adequate liquidity.
Federal Passenger Company’s rating could be downgraded if Moody’s were to (1) downgrade the rating of Russian Railways; or (2) revise downwards its assessment of the probability of the Russian government or Russian Railways providing financial support to Federal Passenger Company in the event of financial distress. In addition, Moody’s could downgrade the company’s rating if its financial metrics or liquidity were to deteriorate materially, or if the share of secured debt in the company’s total debt were to increase.
The principal methodology used in this rating was the Global Passenger Railway Companies published in March 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
Established in 2009, Federal Passenger Company is the leading long-distance passenger railway transportation company in Russia, with a market share of around 95% by passenger turnover. Federal Passenger Company owns and operates a fleet of 22,894 railcars (as of year-end 2013). Federal Passenger Company is a wholly owned subsidiary of Russian Railways, the 100%-state-owned monopoly owner and operator of Russia’s rail infrastructure. In 2012, Federal Passenger Company generated revenue of RUB182 billion ($5.9 billion; excluding state subsidies) and transported 104 million passengers.