ACRA MAINTAINS THE STATUS “RATING UNDER REVISION: NEGATIVE” ON THE CREDIT RATING OF VOLGA-SPORT JSC

The credit rating assigned to Volga-Sport JSC (hereinafter, Volga-Sport, the Company, or the Concessionaire) is based on the moderate risks of the concession agreement currently being carried out, low assessment of the financial policy, high leverage, and moderate liquidity.

The “Rating under revision: negative” status has been assigned to the Company’s credit rating due to the lack of progress in resolving payment discipline problems of the public side of the concession agreement for the ongoing project in the Ulyanovsk Region amid a decrease in the diversification of the Company’s asset pool due to the completion of projects in the Nizhny Novgorod Region and the concentration of risks on a single project (ice arena in the Ulyanovsk Region). Untimely and incomplete receipt of the lease payment under the concluded concession increases the risks associated with the availability of sufficient funds for servicing and subsequent repayment of the bond by the Company.

Volga-Sport was founded in 2010. It is Russia’s first concession company specializing in the construction and operation of sport infrastructure facilities. The Company attracts funds from institutional investors for the implementation of social infrastructure projects by issuing concession bonds. These projects seek to improve the social policy of regions of the Russian Federation.

KEY ASSESSMENT FACTORS

Moderate risks of the concession in progress. Volga-Sport and the government of the Ulyanovsk Region have entered into a concession agreement to build, equip and operate the Volga Sport Arena stadium.

This project in the Ulyanovsk Region is characterized by moderate predictability of the cash flow, which has been unstable in the past due to systematic delays in lease payments by the tenant (Regional State Autonomous Institution Volga-Sport-Arena), which have resulted in penalties being collected via legal proceedings. The assessment of the credit quality of the project is positively influenced by high compensation payments to be made by the concessionary if the targets of the financial model are not achieved (an integral part of the concession agreement), and also the extensive insurance coverage provided by SOGAZ INSURANCE (AAA(RU), outlook Stable).

ACRA assesses the credit quality of the above project as moderate.

The Agency also notes that up to the end of 2021, three more projects were being implemented on the Company’s balance sheet in the Nizhny Novgorod Region under concession agreements of the Concessionaire with the concessionary represented by the government of the Nizhny Novgorod Region, providing for the creation and further operation of three sports and recreation complexes. ACRA assessed the overall credit quality of the above projects as moderately high.

Financial policy is insufficiently conservative and poorly defined. ACRA notes that the Company has no credit quality requirements for the banks with which it places proceeds from lease agreements. The cash flows from the above lease agreements are the principle source of funds to make the coupon payments and repay the par value of the bond issue. ACRA positively assesses the distribution of funds received from operations in deposit accounts at a bank with high credit quality, namely Bank GPB (JSC) (ACRA rating: AA+(RU), Stable).

ACRA will continue to monitor the credit quality of the banks with which the Company choses to deposit its funds from operations.

High leverage and medium coverage. ACRA used the ratio of total debt to FFO before net interest payments (calculated as the sum of lease payments received minus administrative expenses) to assess the Company’s leverage. The averaged ratio of total debt to FFO before net interest payments equals 3.6x for 2019–2024, which corresponds to a high level of leverage according to ACRA’s classification. The Agency assesses the level of interest coverage for leverage based on the ratio of FFO before net interest payments to net interest payments. The weighted value of this indicator stands at 2.5x, which is viewed by ACRA as a medium level of coverage.

Moderate liquidity. The Company continues to partially buy back its bonds using available balances in order to lessen the impact of repayment periods. The final maturity date of bonds is February 29, 2024. The Company had a balance of around RUB 317 mln in funds as of October 15, 2021. A coupon payment of RUB 89 mln is scheduled for 2022. In addition, the Company requires around RUB 100 mln a year to carry out its operations. Therefore, the liquidity currently held by the Company is sufficient to cover its activities in 2022. ACRA sees growing risks in terms of the Company’s possible unpreparedness to repay its bond issue in 2024 and will continue to carefully monitor the financial discipline of counterparties and the degree of conservativeness of the policy for depositing available cash.

KEY ASSUMPTIONS

• Leverage and debt servicing indicators maintained at their current levels;

• Settlement of accounts receivable of the Ulyanovsk Region;

• Tenant promptly performs its obligations in line with the long-term lease agreements;

• No new projects.

potential outlook or rating change factors

The “Rating under revision: negative” status assumes that the rating may be downgraded.

Removal of the “Rating under revision: negative” status and affirmation of the credit rating may be prompted by:

• Implementation of measures aimed at the settlement of the Ulyanovsk Region’s debt to the Company for the 2020–2021 period;

• New projects, the implementation of which may have a positive effect on the credit quality of the Company.

A negative rating action may be prompted by:

• Further growth of the Company’s accounts receivable, as well as a lack of specific solutions within the framework of scenarios developed and submitted to the Agency for the settlement of the debt owed to the Company;

• Initiation of new projects that may have a negative effect on the Company’s credit quality;

• Higher leverage or deteriorating debt servicing;

• Decrease in credit quality of banks with which the Company deposits funds.

RATING COMPONENTS

Standalone creditworthiness assessment (SCA): bb+.

Adjustments: none.

ISSUE RATINGS

No outstanding issues have been rated.

regulatory disclosure

The credit rating of Volga-Sport JSC has been assigned under the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Non-Financial Corporations under the National Scale for the Russian Federation, Methodology for Assigning Credit Ratings to Project Finance Issuers, Instruments, and Obligations on the National Scale for the Russian Federation, and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities.

The credit rating of Volga-Sport JSC was published by ACRA for the first time on December 26, 2019. The credit rating and its outlook are expected to be revised no later than by December 12, 2022.

The credit rating was assigned based on data provided by Volga-Sport JSC, information from publicly available sources, and ACRA’s own databases. The credit rating is solicited, and Volga-Sport JSC participated in its assignment.

In assigning the credit rating, ACRA used only information, the quality and reliability of which was, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.