ACRA affirms AAA(RU) to JSCo “RZD”, outlook Stable, AAA(RU) to bond issues, and withdraws the rating on redeemed 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 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 2,334 bln in 12 months ended June 30, 2018, which is 2% higher than a year earlier. 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 56 bln, and ACRA expects that, in 2018, it will be around RUB 120 bln, including RUB 20 bln allocated from the National Welfare Fund to finance the Baikal-Amur Main Line development program.

Moderate leverage and better coverage. As of end-2017, the total debt to FFO before net interest ratio was 2.6x, and the ratio of the debt adjusted for operating lease to FFO before fixed charges was 2.7x. As the Company needs substantial funds for its capital investment program (about RUB 610 bln in 2018, on a consolidated basis, and about RUB 1.4 tln in 2019–2020), ACRA expects that the leverage will grow and the above ratios will reach 3.1x–3.2x by 2019. At the same time, ACRA notes a certain flexibility of the Company in implementing its capital development program, including depending on state funding for projects initiated by the state. The coverage (the FFO before interest to interest ratio) became equal to 5.9x in late 2017 (against 4.5x in late 2016), pushed up by a 10% growth in the FFO to net interest ratio in 2017 against 2016. The weighted ratio is 5.2x for 2015–2020.

Negative FCF amid strong liquidity. ACRA assesses the Company’s liquidity as very strong: the amount due in the next 12 months is about RUB 200 bln, while the amount of available credit lines exceeds RUB 500 bln. The Company still generates negative FCF because of the large-scale investment program. ACRA expects that the FCF shortage will amount to 7% of the revenues in 2018–2019. The weighted capex-to-revenue ratio is estimated at 25.4% for 2015–2020.

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): aa-

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

1. Certified interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series 12 (RU000A0JQ5Q5), maturity date: 16.05.2019, issue volume: RUB 15 bln, — АAА(RU).
2. Certified interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series 19 (RU000A0JQ7Z2), maturity date: 08.07.2024, issue volume: RUB 10 bln, — АAА(RU).
3. Certified interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series 18 (RU000A0JQ7X7), maturity date: 15.07.2019, issue volume: RUB 15 bln, — АAА(RU).
4. Certified interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series 23 (RU000A0JQRD9), maturity date: 16.01.2025, issue volume: RUB 15 bln, — АAА(RU).
5. Certified interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series 32 (RU000A0JSGV0), maturity date: 25.06.2032, issue volume: RUB 10 bln, — АAА(RU).
6. Certified interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series 28 (RU000A0JTU85), maturity date: 21.03.2028, issue volume: RUB 20 bln, — АAА(RU).
7. Certified exchange-traded interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series BO-18 (RU000A0JTY57), maturity date: 29.04.2043, issue volume: RUB 25 bln, — АAА(RU).
8. Certified exchange-traded interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series BO-09 (RU000A0JTZM7), maturity date: 08.06.2028, issue volume: RUB 25 bln, — АAА(RU).
9. Certified exchange-traded interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series BO-12 (RU000A0JU542), maturity date: 18.08.2033, issue volume: RUB 25 bln, — АAА(RU).
10. Certified exchange-traded interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series BO-13 (RU000A0JU7B7), maturity date: 19.09.2033, issue volume: RUB 25 bln, — АAА(RU).
11. Certified exchange-traded interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series BO-15 (RU000A0JU9M0), maturity date: 11.10.2038, issue volume: RUB 25 bln, — АAА(RU).
12. Certified interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series 30 (RU000A0JUAH8), maturity date: 07.11.2028, issue volume: RUB 15 bln, — АAА(RU).
13. Certified exchange-traded interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series BO-10 (RU000A0JUCG6), maturity date: 29.11.2028, issue volume: RUB 25 bln, — АAА(RU).
14. Certified exchange-traded interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series BO-19 (RU000A0JUPZ8), maturity date: 20.05.2044, issue volume: RUB 25 bln, — АAА(RU).
15. Certified exchange-traded interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series BO-16 (RU000A0JUX71), maturity date: 20.09.2039, issue volume: RUB 25 bln, — АAА(RU).
16. Certified interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series 33 (RU000A0JVB19), maturity date: 28.02.2040, issue volume:  RUB 15 bln, — АAА(RU).
17. Certified interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series 34 (RU000A0JVB27), maturity date: 28.02.2040, issue volume: RUB 15 bln, — АAА(RU).
18. Certified exchange-traded interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series BO-14 (RU000A0JVJS4), maturity date: 29.05.2035, issue volume: RUB 17 bln, — АAА(RU).
19. Certified interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series 35 (RU000A0JVKH5), maturity date: 30.05.2040, issue volume: RUB 15 bln, — АAА(RU).
20. Certified exchange-traded interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series BO-02 (RU000A0JVW71), maturity date: 16.10.2025, issue volume: RUB 15 bln, — АAА(RU).
21. Certified interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series 36 (RU000A0JVY04), maturity date: 15.10.2040, issue volume: RUB 15,2 bln, — АAА(RU).
22. Certified exchange-traded interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series BO-07 (RU000A0JWC82), maturity date: 25.03.2026, issue volume: RUB 20 bln, — АAА(RU).
23. Certified exchange-traded interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series BO-05 (RU000A0JWD57), maturity date: 03.04.2026, issue volume: RUB 10 bln, — АAА(RU).
24. Certified exchange-traded interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series BO-17 (RU000A0JWHU2), maturity date: 26.04.2041, issue volume: RUB 15 bln, — АAА(RU).
25. Certified interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series 42 (RU000A0JWLU4), maturity date: 22.05.2046, issue volume: RUB 15 bln, — АAА(RU).
26. Certified interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series 41 (RU000A0JX1S1), maturity date: 27.11.2031, issue volume: RUB 15 bln, — АAА(RU).
27. Certified exchange-traded interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series BO-11 (RU000A0JXJK7), maturity date: 04.02.2032, issue volume: RUB 15 bln, — АAА(RU).
28. Certified exchange-traded interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series 001Р-01R (RU000A0JXN05), maturity date: 18.05.2032, issue volume: RUB 15 bln, — АAА(RU).
29. Certified exchange-traded interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series 001P-02R (RU000A0JXQ44), maturity date: 02.04.2037, issue volume: RUB 15 bln, — АAА(RU).
30. Certified exchange-traded interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series 001P-03R (RU000A0JXR84), maturity date: 23.04.2037, issue volume: RUB 15 bln, — АAА(RU).
31. Certified exchange-traded interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series 001P-04R (RU000A0JXZB2), maturity date: 29.07.2032, issue volume: RUB 15 bln, — АAА(RU).
32. Exchange-traded interest-bearing non-convertible certified bearer bond issued by JSCo “RZD”, series 001P-09R, (RU000A0ZZRY2), maturity date: 14.10.2033, issue volume: RUB 10 bln, — АAА(RU).
33. Certified interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series 001P-08R (RU000A0ZZGT5), maturity date: 03.08.2028, issue volume: RUB 10 bln, — АAА(RU).
34. Certified interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series 001P-07R (RU000A0ZZ9R4), maturity date: 26.05.2033, issue volume: RUB 10 bln, — АAА(RU).
35. Certified interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series 001P-06R (RU000A0ZZ4P9), maturity date: 04.04.2033, issue volume: RUB 15 bln, — АAА(RU).
36. Certified interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series 001P-05R (RU000A0ZYU05), maturity date: 01.02.2033, issue volume: RUB 20 bln, — АAА(RU).

The credit rating on the bond (ISIN RU000A0JQ7W9) issued by the Company has been withdrawn without affirmation, because of redemption of the issue. Previously, the issue was rated by ACRA on par with the Company — ААА(RU).

The credit rating on the bond (ISIN RU000A0JV8Q2) issued by the Company has been affirmed at ААА(RU) and withdrawn, because of early redemption of the issue. 

Regulatory disclosure

The credit ratings were assigned to Joint Stock Company "Russian Railways" and bonds (ISIN RU000A0JQ7W9, ISIN RU000A0JQ5Q5, ISIN RU000A0JQ7Z2, ISIN RU000A0JQ7X7, ISIN RU000A0JQRD9, ISIN RU000A0JSGV0, ISIN RU000A0JTU85, ISIN RU000A0JTY57, ISIN RU000A0JTZM7, ISIN RU000A0JU542, ISIN RU000A0JU7B7, ISIN RU000A0JU9M0, ISIN RU000A0JUAH8, ISIN RU000A0JUCG6, ISIN RU000A0JUPZ8, ISIN RU000A0JUX71, ISIN RU000A0JVB19, ISIN RU000A0JVB27, ISIN RU000A0JV8Q2, ISIN RU000A0JVJS4, ISIN RU000A0JVKH5, ISIN RU000A0JVW71, ISIN RU000A0JVY04, ISIN RU000A0JWC82, ISIN RU000A0JWD57, ISIN RU000A0JWHU2, ISIN RU000A0JWLU4, ISIN RU000A0JX1S1, ISIN RU000A0JXJK7, ISIN RU000A0JXN05, ISIN RU000A0JXQ44, ISIN RU000A0JXR84, ISIN RU000A0JXZB2, ISIN RU000A0ZZRY2, ISIN RU000A0ZZGT5, ISIN RU000A0ZZ9R4, ISIN RU000A0ZZ4P9, ISIN RU000A0ZYU05) issued by Joint Stock Company "Russian Railways" 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, the Methodology for Analyzing Relationships Between Rated Entities and the State, 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 Individual Issues of Financial Instruments under the National Scale of the Russian Federation was also applied to assign credit ratings to the above issues.

The credit rating assigned to Joint Stock Company “Russian Railways” and credit ratings assigned to bonds (ISIN RU000A0JQ7W9, ISIN RU000A0JQ5Q5, ISIN RU000A0JQ7Z2, ISIN RU000A0JQ7X7, ISIN RU000A0JQRD9, ISIN RU000A0JSGV0, ISIN RU000A0JTU85, ISIN RU000A0JTY57, ISIN RU000A0JTZM7, ISIN RU000A0JU542, ISIN RU000A0JU7B7, ISIN RU000A0JU9M0, ISIN RU000A0JUAH8, ISIN RU000A0JUCG6, ISIN RU000A0JUPZ8, ISIN RU000A0JUX71, ISIN RU000A0JVB19, ISIN RU000A0JVB27, ISIN RU000A0JV8Q2, ISIN RU000A0JVJS4, ISIN RU000A0JVKH5, ISIN RU000A0JVW71,ISIN RU000A0JVY04, ISIN RU000A0JWC82, ISIN RU000A0JWD57, ISIN RU000A0JWHU2, ISIN RU000A0JWLU4, ISIN RU000A0JX1S1, ISIN RU000A0JXJK7, ISIN RU000A0JXN05, ISIN RU000A0JXQ44, ISIN RU000A0JXR84, ISIN RU000A0JXZB2) issued by  Joint Stock Company “Russian Railways” were published by ACRA on November 16, 2017, for the first time. The credit ratings assigned to the bonds (ISIN RU000A0ZZRY2, ISIN RU000A0ZZGT5, ISIN RU000A0ZZ9R4, ISIN RU000A0ZZ4P9, ISIN RU000A0ZYU05) were published by ACRA on November 2, 2018, August 16, 2018, June 14, 2018, April 23, 2018, February 19, 2018, respectively, for the first time.

The credit rating and credit rating outlook on Joint Stock Company “Russian Railways” and the credit ratings on the bonds (ISIN RU000A0JQ5Q5 , ISIN RU000A0JQ7Z2, ISIN RU000A0JQ7X7, ISIN RU000A0JQRD9, ISIN RU000A0JSGV0, ISIN RU000A0JTU85, ISIN RU000A0JTY57, ISIN RU000A0JTZM7, ISIN RU000A0JU542, ISIN RU000A0JU7B7, ISIN RU000A0JU9M0, ISIN RU000A0JUAH8, ISIN RU000A0JUCG6, ISIN RU000A0JUPZ8, ISIN RU000A0JUX71, ISIN RU000A0JVB19, ISIN RU000A0JVB27, ISIN RU000A0JVJS4, ISIN RU000A0JVKH5, ISIN RU000A0JVW71,ISIN RU000A0JVY04, ISIN RU000A0JWC82, ISIN RU000A0JWD57, ISIN RU000A0JWHU2, ISIN RU000A0JWLU4, ISIN RU000A0JX1S1, ISIN RU000A0JXJK7, ISIN RU000A0JXN05, ISIN RU000A0JXQ44, ISIN RU000A0JXR84, ISIN RU000A0JXZB2, ISIN RU000A0ZZRY2, ISIN RU000A0ZZGT5, ISIN RU000A0ZZ9R4, ISIN RU000A0ZZ4P9, ISIN RU000A0ZYU05) issued by Joint Stock Company “Russian Railways” are expected to be revised within one year following the rating action date (November 15, 2018).

The credit ratings were assigned based on the data provided by Joint Stock Company “Russian Railways,” information from publicly available sources, as well as ACRA’s own databases. The credit rating has been assigned on the basis of the consolidated IFRS financial statements of Joint Stock Company “Russian Railways”. The credit ratings are solicited, and Joint Stock Company "Russian Railways" participated in their assignment.

No material discrepancies between the provided data and the data officially disclosed by Joint Stock Company “Russian Railways” in its financial statements were discovered.

ACRA provided no additional services to Joint Stock Company “Russian Railways”. No conflicts of interest were discovered in the course of credit rating assignment.

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