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Rating Action:

Moody's affirms Autobann's B1 CFR; outlook remains stable

19 Dec 2018

London, 19 December 2018 -- Moody's Investors Service has today affirmed the B1 corporate family rating (CFR) and B1-PD probability of default rating (PDR) of the Russian road construction company Autobann (LLC SOYUZDORSTROY).

Concurrently, Moody's has affirmed the B1 rating assigned to the two outstanding rouble-denominated bonds issued by Avtoban-Finance, JSC, an indirect subsidiary of Autobann.

The outlook on all ratings remains stable.

RATINGS RATIONALE

The rating action reflects Autobann's still healthy credit profile, despite its increasing exposure to large-scale complex public--private partnership (PPP) projects as the company has embarked on the Central Ring Road (Startup facility 4) concession in 2018, in addition to its existing portfolio of three PPP projects, including the Central Ring Road (Startup facility 3) concession.

With a total value of RUB 186.7 billion (including VAT), the two sections of the Central Ring Road project are by far the largest in Autobann's backlog and will be funded by (1) RUB113.5 billion capital grants and VAT refunds from the state, (2) RUB7.4 billion subordinated shareholder debt and equity contribution of a nominal amount, and (3) RUB65.8 billion senior debt financing provided by the leading domestic and international banks.

Despite substantial direct long-term investments required from the company (mainly in the form of subordinated shareholder loans) peaking at around RUB5 billion in 2018, Moody's expects Autobann to preserve its healthy standalone financial profile, which will remain supported by (1) the corresponding expansion of the company's construction revenue and EBITDA as it also acts as a general contractor under these projects; and (2) the company's consistent adherence to a conservative financial policy.

Overall, in 2018, Autobann's adjusted recourse debt/EBITDA (excluding concessions-related debt) will stay at around 3.0x, which remains in line with the B1 rating. Starting from 2019, Moody's expects the company to deleverage back to below 2.5x as investment requirements will decelerate, allowing Autobann to start gradually reducing its debt burden.

At the same time, the addition of Startup facility 4 of the Central Ring Road project, with a 60% equity interest, will also drive Autobann's adjusted consolidated leverage (including non-recourse concession-related debt) towards 8.0x-9.0 in 2019-20 from the already elevated level of 6.0x in 2018 as the company also consolidates Startup facility 3, where it holds 75% of share capital.

However, Moody's continues to take into account the fact that the concession-related debt has no direct recourse to the company and is fully backed by cash flows from the State Company Avtodor, which also assumes default risks under the concessions against senior lenders.

The participation of prominent financial institutions in the projects further reduces financial risks for Autobann. In particular, the remaining 25% stake in Startup facility 3 is held by the Eurasian Development Bank (Baa1 stable), which, contributes around 50% of the shareholder financing and, together with Sberbank (Ba1 positive) and Gazprombank (Ba2 positive), also provides debt funding. The Russian Direct Investment Fund (RDIF) is the co-investor in Startup facility 4, while Sberbank and Gazprombank provide senior debt financing.

Operating risks related to the high concentration on the two large-scale projects are also partly mitigated by (1) their strategic importance to the government and the involvement of the state company, which bears the design, site preparation and operating phase risks, limiting the company's exposure to core construction risks only; (2) Autobann's track record of delivering complex projects on time and to the required quality and, in particular, the successful execution of Startup facility 3 to date; (3) the company's historically conservative approach for the expansion of its own capacity and relatively narrow specialisation on highway construction, as it plans to outsource around 50-60% of the work under the projects; and (4) the spread over time of the construction phases of the projects and their adjacent locations.

In addition, Autobann may potentially reduce its stake in the concessions and deconsolidate both Central Ring Road projects in 2019-20 with a number of prospective investors expressing their interest. This will push the company's consolidated leverage back down to historical, pre-concession levels. Nevertheless, Moody's cannot fully rule out possibility that the company will retain its majority stakes in these projects or embark on other large concessions in the future, subject to attractive opportunities in the actively developing Russian concession market.

Therefore, consolidated leverage may stay elevated. At the same time, given the fairly comfortable risk profiles of such projects, Moody's is prepared to tolerate a higher consolidated leverage level for the company, and focuses on the company's standalone (excluding concessions) credit risk profile in its assessment.

Autobann's CFR of B1 continues to reflect the company's track record of sound operating and financial performance through the cycle, supported by its (1) low risk business model, whereby most projects relate to the construction of important federal and regional roads and are performed under contracts with state bodies; (2) strong market fundamentals, reinforced by the planned step-up in the state spending on road construction under the presidential executive order of May 2018; (3) leading position and a reputation as a reliable contractor with strong in-house expertise, which differentiates it from many of its competitors in the market, characterised by high barriers to entry; (4) good visibility of future revenue and cash flows owing to its healthy order backlog and solid bidding opportunities; and (5) healthy liquidity profile, supported by meaningful backup credit facilities provided by banks against state-funded contracts.

The rating remains constrained by Autobann's (1) still small scale relative to its global peers, despite consistently its growing scale of operations in rouble terms; (2) reliance on the Russian road construction market, which stays vulnerable to economic conditions in the country; (3) high project and customer concentration with exposure to large-scale complex construction projects; (4) rising cash flow volatility due to its increasing involvement in large-scale long-term PPP projects; and (5) corporate governance risks associated with the company's single shareholder structure.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects Moody's expectation that Autobann's business model will remain resilient to economic cycles and that it will maintain healthy construction volumes and stable profitability. The outlook also assumes that Autobann's adjusted recourse debt/EBITDA will remain at or below 3.0x on a sustainable basis, while the comfortable risk profile of concession projects with no direct recourse of the concession-related debt to the company will be sustained going forward.

WHAT COULD CHANGE THE RATINGS UP/DOWN

A continuing track record of a strong financial performance and conservative financial policies with adjusted recourse debt/EBITDA sustainably staying below 2.5x, alongside good visibility with regard to cash flow generation and prudent liquidity management, might have a positive effect on the rating. To upgrade the rating, Moody's would also require the evidence of sustainably strong operating performance including successful completion of the construction phase under the Central Ring Road Startup facility 3 concession, as well as sufficient visibility over the impact of future pipeline projects on the company' credit standing.

Autobann's rating could come under downward pressure should the company face (1) a material deterioration in its business or financial profile, illustrated by a visible erosion of profitability, as well as adjusted recourse debt/EBITDA increasing substantially above 3.5x on sustained basis; and (2) increasing financial and operating risks related to the company's large concession projects. A material deterioration of the company's liquidity profile could also exert downward pressure on the rating.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Construction Industry published in March 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Moscow, Autobann (LLC Soyuzdorstroy) is one of the leading Russian infrastructure construction companies specialising in road construction. The company participates in large-scale federal road construction projects, as well as regional projects, mostly in the Central -- but also in the Volga, North West, Urals, and South federal -- districts of Russia. In 2017, Autobann reported RUB40.1 billion in revenue and RUB5.8 billion in adjusted EBITDA.

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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.

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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.

Ekaterina Lipatova
VP-Senior Analyst
Corporate Finance Group
Moody's Investors Service Limited, Russian Branch
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Victoria Maisuradze
Associate Managing Director
Corporate Finance Group
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No Related Data.
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