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Rating Action:

Moody's affirms Autobann's B1 CFR with stable outlook

22 Dec 2017

London, 22 December 2017 -- 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) ("Autobann"). Concurrently, Moody's has affirmed the B1 rating assigned to the two senior unsecured outstanding rouble-denominated bonds of Autobann. The outlook on all ratings remains stable.

RATINGS RATIONALE

Since 2016, Autobann's business model has changed materially, with the company's increasing exposure to public--private partnership (PPP) projects, which involve significant private investments with long-term payback periods. At the moment, the company has three PPP projects in its portfolio, including the Central Ring Road (Startup facility 3) concession, which is by far the largest project in its backlog.

As a result, while Autobann has historically relied on short-term working capital financing with year-end adjusted net debt/EBITDA normally staying at or below 1.0x, the recent shift to longer-term debt has brought a structural change in its leverage pattern.

Nevertheless, Moody's expects that Autobann will continue to preserve a healthy credit profile, which will remain defined by its conservative financial policy, with the continuation of its reported recourse net debt/EBITDA target of below 2.0x. Overall, Autobann's adjusted recourse leverage (which excluded concessions-related debt) has settled in the range of 2.0x-2.5x, which remains in line with the B1 rating.

While its adjusted recourse debt/EBITDA may finally rise towards 3.0x this year, Moody's expects that the company will quickly deleverage back to below 2.5x in 2018 as the increase will be primarily driven by a technical carry-forward of contract receipts from Q4 2017 to Q1 2018.

In addition, with a 75% equity interest, Autobann now consolidates the large-scale Central Ring Road concession, which should drive its adjusted consolidated leverage (including non-recourse concession-related debt) towards 5.0x starting 2018.

However, Moody's notes that the concession-related debt will have no direct recourse to the company and will be fully backed by cash flows from the State Company Avtodor. The participation of prominent financial institutions will further reduce financial risks for Autobann. The remaining 25% stake is held by the Eurasian Development Bank (Baa1 stable), which injects significant part of the equity and subordinated debt and, together with Sberbank (Ba1 stable) and Gazprombank (Ba2 stable), provides debt funding.

Autobann targets to reduce its stake in the concession to 25% and deconsolidate the project in 2018-19, with a number of agreements with prospective investors already in place. When completed, this will push its consolidated leverage back down to historical, pre-concession level.

Although Autobann does not plan majority participation in other concession projects, Moody's cannot fully rule out such possibility, subject to attractive opportunities in the actively developing Russian concession market. Therefore, the consolidated leverage may stay elevated beyond 2018-19. At the same time, given a fairly comfortable risk profile of such projects, Moody's generally tends to tolerate higher leverage level for companies involved in concessions.

Autobann's CFR of B1 remains constrained by its (1) small scale relative to its global peers; (2) reliance on the Russian road construction market, which is vulnerable to economic conditions in the country despite some recent recovery in budget spending on the back of stabilising domestic economic conditions; (3) high project and customer concentration with exposure to large-scale complex construction projects; (4) in-year liquidity volatility, with costs incurred throughout the year, but contract receipts mostly clustered towards the end of each year; and (5) corporate governance risks associated with the company's single shareholder structure.

More positively, the rating reflects Autobann's (1) low risk business model, whereby most projects relate to construction of important federal and regional roads and are performed under contracts with state bodies; (2) leading position and reputation as a reliable contractor with strong in-house expertise, which differentiates it from many of its competitors in the market, which is characterised by high barriers to entry; (3) good visibility on future revenue and cash flows owing to its healthy order backlog and solid bidding opportunities; and (4) conservative approach to project assessment and track record of successful project completions, which reduce execution risks related to large complex projects. Moody's also positively acknowledges Autobann's track record of sound operating performance through the cycle with strong revenue growth and stable profitability.

Autobann's liquidity profile remains healthy, as supported by meaningful backup credit facilities provided by banks against state-funded contracts.

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 assumes that the company's adjusted recourse debt/EBITDA will remain below 3.0x, while adjusted consolidated debt/EBITDA will not exceed 5.5x on a sustainable basis.

WHAT COULD CHANGE THE RATINGS UP/DOWN

Given Autobann's current scale and limited diversification, an upgrade in the medium term is unlikely. In a longer term a continuing track record of a strong financial and operational performance, conservative financial policies , good visibility with regard to cash flow generation, alongside with prudent liquidity management, might have a positive effect on the rating.

Autobann's rating could come under downward pressure should the company face material deterioration in its business or financial profile, illustrated by visible erosion of profitability as well as adjusted recourse debt/EBITDA increasing substantially above 3.0x and adjusted consolidated debt/EBITDA exceeding 5.5x, all on sustained basis. 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.

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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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
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
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Victoria Maisuradze
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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