The credit rating of Investment Construction Company AVTOBAN JSC (hereinafter, ICC AVTOBAN JSC, the Company, or the Group) is based on the Company’s strong business profile and stable market position due to its active engagement in a number of large-scale private-public partnership (PPP) projects, including concessions. The conservative financial policy ensures very low leverage and strong liquidity. The rating is limited by the low FCF margin and medium coverage. In addition, the infrastructure construction industry is exposed to high risks, which also limits the Company’s rating. However, ACRA notes that road construction is the least risky segment in this industry.
ICC AVTOBAN JSC is one of the three largest road construction companies in Russia, with revenues of RUB 132.7 bln and a market share of 10.5% in 2022. The Company is the leader in completed PPP projects in transportation infrastructure (RUB 203 bln). The current project backlog amounts to around RUB 360 bln. About 98% of the Group’s revenues come from government contracts.
key assessment factors
The strong business profile assessment takes into account the fact that construction of road facilities, which the Company’s activities are focused on, is characterized by minimal complexity in the context of the infrastructure construction industry. Therefore, the Complexity and Construction Experience sub-factor received the maximum score. The Agency notes that ICC AVTOBAN JSC has accumulated significant expertise and its contract portfolio covers 100% of its output capacity until 2025 inclusive, which is the reason for the high assessment of the Contract Base Quality sub-factor. At the same time, ACRA highlights the presence of the Company’s large customer concentration risk — State Company “Russian Highways” accounted for about half of the portfolio of orders as of December 2023. The Company loses some of its revenues due to subcontracting (around 40% on average). ICC AVTOBAN JSC has a wide geographic reach covering 18 regions in five federal districts of the Russian Federation.
The medium corporate governance assessment reflects the medium assessment (for the Russian corporate sector) of such sub-factors as Management Structure and Risk Management. The Company has approved procedures and determined bodies responsible for making decisions and their implementation for these areas. In assessing the Management Structure sub-factor, ACRA took into account the concentration of equity capital in the hands of the sole shareholder, as well as the fact that they take part in the Company’s operations. However, ICC AVTOBAN JSC has a board of directors that is responsible for making strategic decisions and includes three independent directors. The medium assessment of Group Structure takes into account the presence of a large number of legal entities in the structure of the Company. At the same time, ACRA notes the absence of intra-group cash flows between concession companies and other companies of the Group. The high assessment of financial transparency takes into account the fact that the Company discloses annual and semi-annual consolidated IFRS financial statements audited by Kept (previously part of KPMG’s international network), quarterly reports, and information about significant events.
The strong financial risk profile assessment is based on the medium size of business (the absolute value of FFO before net interest payments and taxes stands at less than RUB 30 bln), high profitability, very low leverage, and the medium debt service indicator. Low FCF constrains the rating. The Company participates in concession agreements. Debt raised under concession agreements has no recourse to ICC AVTOBAN JSC; the principal shareholder has a surety under the junior debt. Therefore, ACRA regards the concession-related debt of concessionary companies that are part of the Group as segregated from the Company, as concession loans are required by law to be fully repaid in case of any changes in the concession terms and conditions regardless of the concessioner’s fault. In 2022, the ratio of total debt (excluding liabilities under concession agreements) to FFO before net interest grew to 0.84x vs. 0.4x in 2021 amid a decline in the operating cash flow. ACRA expects this indicator to remain below 1.0x in 2023 and further into the forecast period (until 2026). The weighted average ratio of FFO before net interest to interest for 2021–2026 is estimated at 2.4x.
Weak cash flow and high short-term liquidity. In the forecast period, ACRA expects FCF to be moderately negative or neutral, mainly due to growth of the business and the need to make significant investments in working capital. The Agency assesses the Company’s liquidity as high, even taking into account the limited use of cash under concession projects. Liquidity is supported mostly by undrawn credit facilities. The qualitative liquidity assessment is high.
key assumptions
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Revenues and prime costs to grow in 2023–2026, and the investment program to be implemented in line with the Company’s business plan;
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Moderate annual dividend payments in the forecast period.
potential outlook or rating change factors
The Stable outlook assumes that the rating will highly likely stay unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
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Ratio of FFO before net interest to interest exceeding 8.0x;
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Significant qualitative strengthening of the operational risk profile.
A negative rating action may be prompted by:
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Ratio of total debt to FFO before net interest exceeding 1.0x;
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Weighted average debt coverage much lower than 2.5x;
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Short-term liquidity ratio declining below 1.0x;
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FFO before interest and taxes margin declining below 12%.
rating components
Standalone creditworthiness assessment (SCA): a.
Support: none.
issue ratings
Certificated exchange-traded interest-bearing bonds, series BO-P02 (RU000A100733) of AVTOBAN-Finance JSC, maturity date: March 19, 2024, issue volume: RUB 3 bln — А(RU).
Rationale. The abovementioned bond issue of AVTOBAN-Finance JSC, a member company of ICC AVTOBAN JSC, represents senior unsecured debt of AVTOBAN-Finance JSC according to ACRA’s methodology, which is secured by call options and sureties of the operating companies of AVTOBAN Group, including DSK AVTOBAN JSC, Khanty-Mansiyskdorstroy OJSC, and ICC AVTOBAN JSC. The rating has been assigned based on the issue documentation, according to which the guarantors are jointly liable to the bondholders for the issuer’s failure to perform and/or improper performance of its obligations.
Due to the absence of either structural or contractual subordination of the issue, ACRA regards it as pari passu to other existing and future unsecured and unsubordinated obligations of the Company.
In accordance with ACRA’s methodology and in view of the Company’s high creditworthiness and very low leverage, the credit rating of the issue is on par with that of the Company, i.e. A(RU).
regulatory disclosure
The credit ratings have 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 and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities. The Methodology for Assigning Credit Ratings to Financial Instruments on the National Scale for the Russian Federation was also applied to assign the credit rating to the above issue.
The credit ratings of Investment Construction Company AVTOBAN JSC and the bond issues of AVTOBAN-Finance JSC (ISIN RU000A100733) were published by ACRA for the first time on December 29, 2017 and December 20, 2019, respectively. The credit rating of Investment Construction Company AVTOBAN JSC and its outlook and the credit rating of the bond issue of AVTOBAN-Finance JSC (ISIN RU000A100733) are expected to be revised within one year following the publication date of this press release.
The credit ratings were assigned based on data provided by Investment Construction Company AVTOBAN JSC, information from publicly available sources, and ACRA’s own databases. The credit ratings were assigned based on the consolidated IFRS financial statements of Investment Construction Company AVTOBAN JSC. The credit ratings are solicited and Investment Construction Company AVTOBAN JSC participated in their assignment.
In assigning the credit ratings, ACRA used only information, the quality and reliability of which were, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.
ACRA provided no additional services to Investment Construction Company AVTOBAN JSC. ACRA provided additional services to AVTOBAN-Finance JSC. No conflicts of interest were discovered in the course of credit rating assignment.
