First-time rating assignment
London, 30 April 2013 -- Moody's Investors Service has today assigned a B3 corporate family
rating (CFR) and B3-PD probability of default rating (PDR),
as well as a Baa3.ua national scale rating (NSR), to Lemtrans
LLC. The outlook on all ratings is negative. This is the
first time Moody's has assigned a rating to Lemtrans.
RATINGS RATIONALE
Today's rating action reflects that although Lemtrans's business
profile and financial metrics are strong for a B3 rating, the rating
is currently constrained by that of the sovereign (B3 negative) and the
B3 foreign-currency bond country ceiling for Ukraine, which
capture the country's political, legal, fiscal and regulatory
environment. This environment includes the risk of the devaluation
of the domestic currency (hryvna, or UAH), which Lemtrans
is exposed to given that the company generates a predominant portion of
its revenues from its domestic operations (albeit these are partially
linked to the US dollar). In addition, Lemtrans's ability
to service its debt, all of which is foreign-currency denominated,
could be negatively affected by actions taken by the Ukrainian government
to preserve the country's foreign exchange reserves. Moody's
also notes that the company's revenues and cash flows generated
in the country are exposed to foreign-currency transfer and convertibility
risks, which are reflected in the B3 foreign-currency bond
country ceiling for Ukraine.
In addition, the B3 CFR factors in (1) Lemtrans's moderate
size; (2) its high industry and customer concentration, with
the company's largest customers, DTEK (B3 negative) and Metinvest
(B3 negative), representing 75% of its total revenue for
2012, which renders Lemtrans's business dependent on its continuing
relationships with these two customers; (3) its highly concentrated
ownership, which creates the risk of rapid changes in the company's
strategy and development plans, along with the risk of a revision
of its financial policy and an increase in shareholder distributions,
and shaping its pricing policy in favour of DTEK and Metinvest; (4)
the company's history of material related-party transactions,
which in Moody's view lack transparency and economic rationale;
(5) Lemtrans's lack of track record of operating under its current
ownership structure (i.e., following the consolidation
of 100% of the company's share capital by System Capital
Management Limited (SCM) in August 2012), and evolving structure
of the Lemtrans group; and (6) the high average age of the company's
railcar fleet, at 20 years, with around 30%-35%
of the current fleet reaching the end of its useful life in 2013-17.
More positively, Lemtrans's rating also reflects the company's
(1) solid market share of around 16% of Ukraine's entire
gondola railcar fleet and 18% in terms of cargo volumes transported
in gondola railcars (as of year-end 2012); (2) long-term
relationships with key customers and the absence of domestic freight transportation
companies of a similar size that could easily replace Lemtrans in servicing
its key customers' transportation needs; (3) high operating
efficiency, reflected by an EBITA margin of above 40% (as
adjusted by Moody's); (4) robust projected financial metrics,
which demonstrate the company's ability to maintain leverage --
measured by debt/EBITDA -- below 3.0x, EBIT/interest
above 2.0x and retained cash flow (RCF)/net debt above 15%
(all metrics are as adjusted by Moody's) even under stress scenario;
and (5) adequate liquidity.
The negative outlook on Lemtrans's ratings mirrors the negative
outlook on Ukraine's B3 sovereign rating and the consequent risk
of a further lowering of Ukraine's foreign-currency bond
country ceiling.
WHAT COULD CHANGE THE RATING UP/DOWN
Lemtrans's ratings are constrained by the Ukrainian political,
business, legal and regulatory environment, given that all
its assets and business activities are concentrated within the country.
Therefore, the company's ratings are ultimately dependent
on sovereign-level developments. Positive pressure could
be exerted on Lemtrans's ratings if Moody's were to upgrade
Ukraine's sovereign rating and raise its foreign-currency bond
country ceiling, coupled with Lemtrans (1) building a track record
of consistently robust financial performance and strong market position;
(2) conducting related-party transactions on an arms-length
basis and in a transparent manner; and (3) maintaining adequate liquidity.
Negative pressure could be exerted on the ratings as a result of (1) a
further potential downgrade of the sovereign rating or lowering of Ukraine's
foreign-currency bond country ceiling; or (2) a material deterioration
in the company's operating and financial performance, liquidity
or market position.
PRINCIPAL METHODOLOGY
Lemtrans LLC's ratings were assigned by evaluating factors that
Moody's considers relevant to the credit profile of the issuer,
such as the company's (i) business risk and competitive position compared
with others within the industry; (ii) capital structure and financial
risk; (iii) projected performance over the near to intermediate term;
and (iv) management's track record and tolerance for risk. Moody's
compared these attributes against other issuers both within and outside
Lemtrans LLC's core industry and believes Lemtrans LLC's ratings
are comparable to those of other issuers with similar credit risk.
Lemtrans is the largest private freight rail transportation company in
Ukraine by railcar fleet size (15,288 railcars in operation as of
year-end 2012, which represented 8% of the country's
total and 16% of its entire gondola railcar fleet), as well
as by cargo transportation volumes (13% of total freight volumes
and 18% of volumes transported in gondola railcars in 2012).
In 2012, the company derived 79% of its revenues from freight
transportation and other related services, 17% from trading
freight railcars and producing railway equipment, and 4%
from financial leasing of railway equipment. Lemtrans is fully
controlled by System Capital Management Limited (SCM).
Moody's National Scale Ratings (NSRs) are intended as relative measures
of creditworthiness among debt issues and issuers within a country,
enabling market participants to better differentiate relative risks.
NSRs differ from Moody's global scale ratings in that they are not globally
comparable with the full universe of Moody's rated entities, but
only with NSRs for other rated debt issues and issuers within the same
country. NSRs are designated by a ".nn" country
modifier signifying the relevant country, as in ".mx"
for Mexico. For further information on Moody's approach to national
scale ratings, please refer to Moody's Rating Methodology published
in October 2012 entitled "Mapping Moody's National Scale Ratings
to Global Scale Ratings".
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides certain regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this rating action, and
whose ratings may change as a result of this rating action, the
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Artem Frolov
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service Limited, Russian Branch
7th floor, Four Winds Plaza
21 1st Tverskaya-Yamskaya St.
Moscow 125047
Russia
Telephone: +7 495 228 6060
Facsimile: +7 495 228 6091
David Staples
MD - Corporate Finance
Corporate Finance Group
Telephone: 00971 4237 9536
Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's assigns B3 rating to Lemtrans; negative outlook
