ACRA assigns ААА(RU) to JSCo “RZD,” outlook Stable, and ААА(RU) to bond issues

The credit rating assigned to Joint Stock Company “Russian Railways” (hereinafter, the Company) is on par with the financial obligations of the Russian Government, in view of very high systemic importance of the Company for the Russian economy and very high state influence on the Company.

The standalone creditworthiness assessment (SCA) of the Company (а+) hinges on the strong industry risk profile of the Company, supported by its monopolistic positions, very large scale and high profitability of business, moderate leverage, and very high liquidity. The SCA is restricted by the negative free cash flow caused by substantial capital investments.

The Company is a natural monopoly, one of the largest global railway companies, which owns and operates railway infrastructure and locomotives in Russia. The Company’s consolidated IFRS revenue amounted to about RUB 2,175 bln in 12 months ended June 30, 2017. The sole shareholder of the Company is the Russian Federation.

Key rating assessment factors

Very high systemic importance of the Company for the Russian economy and very high state influence on the Company’s creditworthiness. The systemic importance is very high because the Company is a natural monopoly, the largest employer and an inseparable part of the national economy. The state influence is very high, as the state exercises operating and shareholding control over the Company, subsidizes the Company and finances its investment program through the National Welfare Fund and tax benefits. In 2016, the volume of state funding, including subsidies and contributions to charter capital, amounted to RUB 116.7 bln, and ACRA expects that, in 2017, it will be not less than RUB 150 bln.

Strong industry risk profile stems from the Company’s vertically integrated structure, as the Company is the owner and operator of railway infrastructure and rolling stock. In 2016, the share of rail transport amounted to 87% of cargo turnover (without pipelines) and 24% of passenger turnover in the Russian Federation.

Strong business profile is supported by the high stability of the transportation segment, monopolistic positions of the Company, and high intensity of rolling stock utilization. On the other hand, the Agency notes that the limiting factors include a moderate regulatory risk and a substantial volume of the investment program, including purchase of new rolling stock.

High level of corporate governance. The Company’s board of directors consists of 13 members, including three independent directors. The risk management function is well-regulated, and risk identification and management procedures are in place. ACRA notes that the share of foreign currency-denominated and floating rate liabilities (about 35% and 30%, respectfully) is substantial, but the Company applies hedging instruments to manage risks, including natural hedge. The Company maintains an adequate financial transparency.

Moderate leverage. As of end-2016, the total debt to FFO before net interest ratio was 2.5х, and the ratio of the debt adjusted for operating lease to FFO before fixed charges was 2.6х. As the Company needs substantial funds for its capital investment program (about RUB 625 bln in 2018, on a consolidated basis), ACRA expects that the leverage will grow and the above ratios will reach 3.0х–3.1х on the horizon of 2017–2019. The coverage (the FFO before interest to interest ratio) was 4.5х in late 2016. About a third of the portfolio of loans is floating rate, which, in ACRA’s opinion, may result in certain savings on interest expenses on the forecast horizon of 2017–2019 (as the weighted ratio for 2014–2019 is 4.8х).

Negative FCF amid strong liquidity. ACRA assesses the Company’s liquidity as very strong: the amount due in the next 12 months is not more than RUB 100 bln, while the amount of available credit lines exceeds RUB 400 bln. In 2014–2016, the Company generated negative FCF because of the large-scale investment program; capital expenditures exceeded RUB 1,318 bln in that period. ACRA expects that the FCF shortage will amount to 5–7% of the revenues in 2017–2018. The weighted capex-to-revenue ratio is 24.1% for 2014–2019.

Key assumptions

• The total amount of annual state support, including subsidies and contributions to the charter capital, at not less than RUB 150 bln;
• Successful implementation of the capital investment program;
• Annual dividend at not more than RUB 7 bln.

Potential outlook or rating change factors

The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.

A negative rating action may be prompted by:

• A significant decline in the systemic importance of the Company for the Russian economy;
• A loss of shareholding control on the part of the state or a substantial decrease of volume of financial support.

Rating components

Standalone creditworthiness assessment (SCA): а+

Support: on par with the RF.

Issue ratings

Credit rating rationale. Bond issues listed below are senior unsecured debt obligations of the Company. Due to the absence of either structural or contractual subordination of the bonds, ACRA ranks the bonds pari passu with other existing and future unsecured and unsubordinated debt obligations of the Company.

In accordance with the ACRA methodology, and taking into account high creditworthiness and the moderate leverage of the issuer, as well as the absence of secured debt obligations, ACRA applies a simplified approach, according which the bond issues are rated AAA(RU), on par with the credit rating assigned to the Company.

Key issue properties

Issuer/Actual issuer of all bonds specified below: JSCo “RZD”
(Issuer credit rating: AAA(RU), outlook Stable)

1) ISIN RU000A0JQ5Q5

2) ISIN RU000A0JQ7W9

3) ISIN RU000A0JQ7Z2

4) ISIN RU000A0JQ7X7