The credit rating of Investment Construction Company AVTOBAN JSC (hereinafter, AVTOBAN, the Company, or the Group) has been downgraded in view of lower scores for profitability, leverage and coverage amid a decline in the average marginality of current projects on the back of changing market conditions. ACRA assesses the Company’s business profile and market position as high due to its active engagement in a number of large-scale private-public partnership (PPP) projects, including concessions. The rating is still supported by the leverage assessment and the strong liquidity position. The rating is constrained by the low coverage and medium profitability. In addition, the infrastructure construction industry is generally exposed to high risks, which also limits the Company’s rating. However, the Agency notes that road construction is the least risky segment in this industry.
AVTOBAN is one of the three largest road construction companies in Russia, with revenues of RUB 151 bln and a market share about 11% in 2023. The Company is the leader in terms of the volume of completed concession projects in transportation infrastructure (RUB 203 bln). The current project backlog amounts to around RUB 320 bln. About 98% of the Group’s revenues come from government contracts.
key assessment factors
The high business profile assessment takes into account the fact that construction of road facilities (mostly hard surface roads), which the Company is 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 AVTOBAN has accumulated significant expertise and its contract portfolio covers a high share of its output capacity until 2026 inclusive, which is the reason for the high score for the Contract Base Quality sub-factor. At the same time, ACRA highlights the presence of the risk of concentration on a large customer — State Company “Russian Highways” (ACRA rating AA(RU), outlook Stable) that accounted for about 37% of the portfolio of orders as of October 2024. The Company loses some of its revenues due to subcontracting (around 40% on average). AVTOBAN has a wide geographic reach covering 19 regions in five federal districts of the Russian Federation.
The medium corporate governance assessment reflects medium scores (for the Russian corporate sector) for the Management Structure and Risk Management sub-factors. 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 latest changes in the Company’s shareholding (before 2024, AVTOBAN belonged to a sole shareholder, and now there are two shareholders), as well as the fact that one of the shareholders is involved in the Company’s operating activities. AVTOBAN 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; however, the Agency notes the absence of intra-group cash flows between the 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).
The medium financial risk profile assessment is based on the medium size of business (the absolute value of FFO before net interest and taxes stands at less than RUB 30 bln), medium profitability, low leverage, positive FCF, and the strong liquidity position. The rating is constrained by the low (as per ACRA’s methodology) coverage: the weighted average ratio of FFO before net interest to interest for 2022–2027 is less than 2.5x. In addition, shrinking contract base and declining average marginality of the current projects amid changes in the market conditions had a negative impact on the Company’s financial performance in recent reporting periods. ACRA expects that from 2024 to 2027, revenue will be in the range of RUB 110–130 bln, while the average annual FFO before net interest and taxes margin will remain above 8%.
The ratio of total debt (excluding liabilities under concession agreements) to FFO before net interest increased to 1.2x by the end of 2023 vs. 0.8x in 2022 against the backdrop of a decrease in operating cash flow. The Company participates in concession agreements. Debt raised under concession agreements has no recourse to AVTOBAN. 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. The Agency expects the leverage to remain low (less than 2.0x) in 2024 and further into the forecast period (until 2027).
Given that the Company does not need significant investments to replenish working capital against the background of the upcoming completion of a number of major projects, as well as the lack of plans to significantly expand the operating activities, ACRA expects FCF to be positive in the forecast period (provided that dividend payments are moderate). Significant free cash balances in the Company’s accounts (even taking into account a limited use of cash under concession projects) and a significant amount of undrawn credit lines ensure a strong liquid position. The Agency maintains a high qualitative assessment of liquidity, taking into account the Company’s extensive funding opportunities (including through the issuance of public debt).
key assumptions
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Revenues within RUB 110–130 bln in 2024–2027.
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Average annual FFO before net interest and taxes margin above 8% in 2024–2027.
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Average annual ratio of FFO before net interest to interest within 2.5x to 1.0x in 2024–2027.
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Ratio of total debt (excluding liabilities under concession agreements) to FFO before net interest not exceeding 2x.
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The investment program being implemented in line with the Company’s business plan.
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Moderate annual dividend payments in the forecast period.
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Access to external sources of liquidity.
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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Weighted average ratio of FFO before net interest to interest exceeding 2.5x;
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Significant qualitative strengthening of the operational risk profile.
A negative rating action may be prompted by:
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Weighted average ratio of FFO before net interest to interest falling below 1.0x;
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FFO before interest and taxes margin consistently below 8%.
rating components
Standalone creditworthiness assessment (SCA): a-.
Support: none.
issue ratings
No outstanding issues have been rated.
regulatory disclosure
The credit rating 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 and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities.
The credit rating of Investment Construction Company AVTOBAN JSC was published by ACRA for the first time on December 29, 2017. The credit rating of Investment Construction Company AVTOBAN JSC and its outlook is expected to be revised within one year following the publication date of this press release.
The credit rating was assigned based on data provided by Investment Construction Company AVTOBAN JSC, information from publicly available sources, and ACRA’s own databases. The credit rating was assigned based on the consolidated IFRS financial statements of Investment Construction Company AVTOBAN JSC. The credit rating is solicited and Investment Construction Company AVTOBAN JSC participated in its assignment.
In assigning the credit rating, 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. No conflicts of interest were discovered in the course of credit rating assignment.
