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Rating Action:

Moody's announces actions on GRIs: Russian Railways and its subsidiary Federal Passenger Company on review for downgrade

01 Apr 2014

The ratings of GRIs ALROSA, IRKUT, Kamaz, Russian Helicopters are not affected by the action on the sovereign

London, 01 April 2014 -- Moody's Investors Service has today placed on review for downgrade the Baa1 senior unsecured issuer rating of the Government-related Issuer (GRI) Russian Railways Joint Stock Company and the Baa1 senior unsecured rating of RZD Capital PLC, which is the issuer of loan participation notes for the sole purpose of financing loans to Russian Railways. Concurrently, Moody's has placed on review for downgrade the Baa2 senior unsecured issuer rating of Federal Passenger Company OJSC, a wholly owned subsidiary of Russian Railways.

These rating actions follow Moody's placement of Russia's Baa1 government bond rating on review for downgrade on 28 March 2014. For additional information, please refer to the related announcement: https://www.moodys.com/research/Moodys-places-Russias-Baa1-government-bond-rating-on-review-for--PR_294200

The ratings and outlooks of GRIs Kamaz OJSC (Ba1 stable), IRKUT Corporation JSC (IRKUT; Ba2 stable), Russian Helicopters JSC (Ba2 negative) and ALROSA OJSC (Ba3 positive) are not affected by the action on the sovereign.

RATINGS RATIONALE

RATIONALE BEHIND REVIEW FOR DOWNGRADE FOR RUSSIAN RAILWAYS AND FEDERAL PASSENGER COMPANY

The placement of Russian Railways' Baa1 senior unsecured issuer rating on review for downgrade reflects Moody's view that (1) Russian Railways has strong linkages with the government and the company's rating remains constrained by that of the sovereign; and (2) Russian Railways continues to depend on the government's willingness to maintain the scope of its support (including tariff indexation, subsidies, equity injections and long-term low interest-rate financing) at a level sufficient for Russian Railways to maintain its financial metrics in line with its conservative financial policy.

The placement of Federal Passenger Company's Baa2 senior unsecured issuer rating on review for downgrade reflects its close linkage with Russian Railways' rating, as Federal Passenger Company is dependent on both the government's and Russian Railways' ability to provide financial support in the event of financial distress, as well as on the operating framework set by the government and Russian Railways.

WHAT COULD CHANGE THE RATING UP/DOWN

Upward pressure on Russian Railways' and Federal Passenger Company's senior unsecured issuer ratings is unlikely at present, given the current review for downgrade. Moody's could confirm the ratings if it were to confirm Russia's government bond rating at the current level, provided there is no material deterioration in company-specific factors, including operating and financial performance and liquidity. At this point, considering its solid standalone profile, Moody's expects that the rating of Russian Railways is unlikely to be different from the rating of the sovereign at the end of the rating review.

Moody's would downgrade Russian Railways' senior unsecured issuer rating if it were to (1) downgrade the rating of the Russian government; or (2) revise downwards its assessment of the probability of the government providing extraordinary support to the company in the event of financial distress.

Moody's could downgrade Federal Passenger Company's senior unsecured issuer rating if it were to (1) downgrade the rating of Russian Railways; or (2) revise downwards its assessment of the probability of the Russian government or Russian Railways providing financial support to Federal Passenger Company in the event of financial distress. In addition, Moody's could downgrade the company's rating if its financial metrics or liquidity were to deteriorate materially, or if the share of secured debt in the company's total debt were to increase. Considering the strong standalone profile of Federal Passenger Company, Moody's expects that its rating would be confirmed if the rating of Russian Railways is confirmed.

PRINCIPAL METHODOLOGY FOR RUSSIAN RAILWAYS AND FEDERAL PASSENGER COMPANY

The principal methodologies used in rating Russian Railways Joint Stock Company and RZD Capital PLC were Global Surface Transportation and Logistics Companies published in April 2013, and Government-Related Issuers: Methodology Update published in July 2010. The principal methodologies used in rating Federal Passenger Company OJSC was Global Passenger Railway Companies published in March 2013. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Russian Railways is the 100%-state-owned monopoly owner and operator of Russia's rail infrastructure and provider of freight and passenger rail transportation services. As of year-end 2012, the group had approximately 1.2 million employees. In 2012, Russian Railways generated revenue of RUB1.54 trillion ($49.6 billion), of which 73% was contributed by freight transportation services.

Established in 2009, Federal Passenger Company is the leading long-distance passenger railway transportation company in Russia, with a market share of around 95% by passenger turnover. Federal Passenger Company owns and operates a fleet of 22,894 railcars (as of year-end 2013). Federal Passenger Company is a wholly owned subsidiary of Russian Railways, the 100%-state-owned monopoly owner and operator of Russia's rail infrastructure. In 2012, Federal Passenger Company generated revenue of RUB182 billion ($5.9 billion; excluding state subsidies) and transported 104 million passengers.

COMMENTS ON OTHER GRIs

The ratings and outlooks of GRIs Kamaz, IRKUT, Russian Helicopters and ALROSA are not affected by the action on the sovereign because a one notch downgrade of the sovereign would only modestly erode the probability of these GRIs receiving support from the sovereign. The support for these GRIs is categorised as strong for Kamaz, IRKUT and Russian Helicopters and as moderate for ALROSA. In addition, at this point Moody's does not expect that their standalone rating profile will be substantially affected by the weakening of Russia's economic strength, or the conflict with Ukraine and the related uncertainty over future policy actions, or that the current solid positioning of their standalone profile will be sufficient to absorb a degree of potential erosion of cash flows.

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.

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.

Artem Frolov
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

Jean-Michel Carayon
Senior Vice President
Corporate Finance Group
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Moody's announces actions on GRIs: Russian Railways and its subsidiary Federal Passenger Company on review for downgrade
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