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Rating Action:

Moody's affirms FPC's Baa2 rating, outlook changed to negative

02 Jul 2020

London, 02 July 2020 -- Moody's Investors Service (Moody's) has today affirmed the Baa2 issuer rating of Federal Passenger Company JSC (FPC), a virtual monopoly provider of long-distance passenger railway transportation in Russia. The outlook on FPC has been changed to negative from stable.

RATINGS RATIONALE

Today's affirmation of FPC's rating with a negative outlook follows the concurrent affirmation of the Baa2 issuer rating with negative outlook of FPC's parent, Russian Railways Joint Stock Company (RZD), the 100% state-owned monopoly owner and operator of Russia's rail infrastructure, given the strong interlinkage between the companies.

The rating action also balances (1) the impact of the breadth and severity of the demand shock from the coronavirus outbreak on FPC's operating and financial performance, with uncertainties around the evolution of the pandemic affecting potential recovery prospects; and, at the same time, (2) the company's retained focus on conservative financial policy and its strong financial position and liquidity before the outbreak, which, along with the strong support from RZD and the Government of Russia (Baa3 stable), should help to preserve its credit profile in line with the current rating.

The rapid and widening spread of the coronavirus outbreak, the deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. Rail passenger transportation sector has been one of the sectors most significantly affected by the outbreak given its exposure to travel restrictions and sensitivity to consumer demand and sentiment. Thus, FPC was forced to cancel or reduce the frequency on all its routes in response to a severe fall in passenger traffic by 80% in April-May 2020, with this decline persisting through the second quarter of 2020.

At the same time, FPC will likely be able to ramp up its capacity more swiftly than airlines' or airports' because of its exclusive focus on domestic passenger rail transportation including essential regional routes that provide access to remote locations with no airport or road infrastructure. Overall, Moody's assumes travel activity to resume over Q3 and Q4 2020, with some revival in passenger demand already recorded in June 2020 backed by softening of lockdown measures across the regions and the pickup in domestic tourism. Nevertheless, strained consumer sentiment and discretionary spending as well as intensified competition with air travel will likely limit the recovery, with FPC's total passenger number to decline by around 40% in 2020 and not fully restoring to the 2019 levels until 2022. The risk of an extended disruption to passenger travel as a result of a greater than already anticipated adverse impact from the coronavirus crisis also remains high.

The drop in passenger traffic will dent FPC's revenue and adjusted EBITDA, which Moody's expects to decline by around 40% in 2020. At the same time, FPC's credit quality will remain supported by its conservative financial policy with a targeted net leverage of 2.5x and a historically unlevered financial profile (adjusted debt/EBITDA was around 1.7x in 2019), which along with intensified cost cutting and flexible investments, provide some buffer to accommodate weak earnings and cash flow.

Given the company's role as a highly strategic business, Moody's also incorporates in its assessment an implied support from the Russian government and its parent, which will compensate for the part of the expected revenue shortfall. In particular, RZD already allowed FPC to postpone the payments for infrastructure and locomotives, which together account for around 50% of its costs, and will also inject around RUB15 billion of equity to retain FPC's capital spending at around RUB50 billion. As part of the state support, in June 2020 FPC signed a one-year RUB 3 billion subsidized loan agreement at 1.5% per annum to finance its salary payments and expects the government to approve new support measures by the end of Q3 2020.

As a result, FPC's reported net leverage will be contained almost in line with its financial policy, while its adjusted debt/EBITDA will also remain comfortably below 3.5x despite the current severe demand shock and the subsequent major drop in earnings. Moreover, although without additional state support measures FPC's credit metrics in 2020 would weaken materially outside of Moody's rating guidance, the agency expects the company to be able to restore them to an acceptable level for the current rating category in 2021-22, underpinned by its strong business profile as well as a consistent adherence to its conservative financial policy and prudent approach to development strategy.

The temporary deterioration in credit metrics in 2020 will also be mitigated by FPC's sound liquidity, which benefits from a comfortable debt maturity profile, substantial available long-term credit facilities, and the established intergroup lending set-up with RZD.

Nevertheless, there is still a high degree of uncertainty around the evolution of the coronavirus outbreak, with risks of extended disruption to travel causing further strain on the company's balance sheet and liquidity beyond the agency's current expectations, resulting in a negative outlook on the rating.

RATIONALE FOR THE NEGATIVE OUTLOOK

The negative outlook on FPC mirrors the outlook on its parent, RZD, and reflects the potential for a greater than already anticipated adverse impact from the coronavirus crisis on the rail passenger transportation industry, as well as the still pending government decision on the state support measures, which drive some uncertainties over the prospects of FPC's credit metrics recovery over the next two years.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The ratings are unlikely to be upgraded in the short term. The rating outlook could be stabilised subject to coronavirus outbreak being contained, travel restrictions being lifted, and passenger volumes returning to normalised levels.

In the longer-term, positive pressure could be exerted on FPC's rating if Moody's were to upgrade the Government of Russia's (Baa3 stable) and RZD's ratings, provided that there is also an improvement in the company-specific factors, including its operating and financial performance, supported by a proven track record of growth in passenger traffic and sustainable profitability, and subject to the company maintaining its adjusted debt/EBITDA at or below 2.5x and sound liquidity.

FPC's rating could be downgraded in case of (1) a downgrade of the sovereign rating or Russian Railways' rating; (2) a downward revision in Moody's assessment of the probability of the company receiving day-to-day or extraordinary support from the Russian government or RZD; or (3) Moody's expectation of a deeper and longer decline in passenger volumes into 2021, driving a corresponding deterioration in FPC' liquidity or standalone credit strength, including its credit metrics in a post-crisis environment significantly beyond Moody's expectations and outside the company's financial policy of reported net debt/EBITDA of 2.5x on a sustained basis.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) CONSIDERATIONS

FPC is subject to the state oversight and regulations, including via Russian Railways. The parent exercises full operating and strategic control over the company, with an established track record of a prudent approach to approving FPC's investment programme and consistent support to its conservative financial policy. In particular, while the company's internal maximum leverage is set at reported net debt/EBITDA of 2.5x, FPC targets a more comfortable net leverage of around 2.0x when developing its capital spending plan.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Global Passenger Railway Companies published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1072090. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Federal Passenger Company JSC (FPC) has a virtual monopoly in long-distance passenger railway transportation in Russia. FPC is 100% minus one share owned by Russian Railways Joint Stock Company (RZD), the 100% state-owned monopoly owner and operator of Russia's rail infrastructure. FPC owns and operates its own fleet of passenger railcars and rents locomotive traction services from Russian Railways. In 2019, FPC generated revenue of RUB237.4 billion and adjusted EBITDA of RUB30.9 billion.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

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
Vice President - Senior 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.
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JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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