Affirms B1 CFR and B1-PD rating
London, 14 December 2015 -- Moody's Investors Service has today assigned a B1 rating (with a loss-given
default assessment of LGD4) to the RUB3 billion (approximately $43
million) of senior unsecured rouble-denominated bonds due in 2020
to be issued by the Russian road construction company Autobann (LLC SOYUZDORSTROY)
via its indirect subsidiary Avtoban-Finance, JSC.
The outlook is stable.
Avtoban-Finance will issue the bonds for the sole purpose of financing
loans to Autobann's key operating companies - OAO DSK Autobann
and OAO KhMDS, and will rely on these two main operating subsidiaries
of the group to service the bonds.
Concurrently, Moody's has affirmed Autobann's B1 corporate
family (CFR) and B1-PD probability of default (PDR) ratings with
a stable outlook, as while the company's leverage will increase
post-issuance it will remain within levels commensurate for the
current rating.
RATINGS RATIONALE
Today's assignment of a B1 rating to Autobann's rouble-denominated
bonds -- at the level of the company's CFR - reflects
the surety provided by DSK Autobann, as well as support from the
holding company, Soyuzdorstroy, and OAO KhMDS, who will
provide an irrevocable offer to acquire the bonds in the case of a breach
of payment obligations by Avtoban-Finance to prevent the bond default.
Moody's decision to affirm Autobann's B1 ratings reflects
the rating agency's expectations that, following the issuance
of the bonds, which should cost-efficiently replace some
of the more expensive short-term working capital financings,
the company's leverage measured by debt/EBITDA will increase,
but will remain at around 2.0x, and below 1.0x,
or negative, on a net-debt basis.
The B1 CFR reflects the company's (1) sectoral, geographic
and customer concentration relative to global peers, with reliance
upon a single industry segment -- road construction --
and the majority of contracts being with the Russian government;
(2) competitive market landscape; (3) weakening macroeconomic environment
in Russia; (4) exposure to accelerated cost inflation in Russia;
(5) in-year liquidity volatility, with costs incurred throughout
the year but contract receipts clustered towards the end of each year;
and (6) single shareholder corporate structure, which potentially
presents corporate governance risks.
More positively, the rating takes into account Autobann's
(1) moderate risk business model whereby most projects relate to construction
of important federal roads and are performed against contracts with the
state bodies; (2) modest exposure to complex multi-year works
such as junctions and bridges; (3) track record of successful project
completion; (4) strong liquidity profile, supported by positive
free cash flow generation; and (5) conservative financial policies
and historically strong leverage metrics with most of debt related to
short-term working capital financing fully repaid by the end of
each year.
Notwithstanding a material reduction in the state-funded construction
volumes initiated by the government at the beginning of 2015, Autobann
increased its 2015 revenue by approximately 5.6% year-on-year.
The company maintains a healthy order backlog that should provide for
revenue generation in excess of RUB30 billion a year in 2016-2017.
The company was able to defend its 11%-12% EBITDA
margin through efficient cost control and prudent project management.
STRUCTURAL CONSIDERATIONS
The surety is in a form that should give bondholders the ability to make
a guarantee claim on DSK Autobann for repayment of the bonds if Avtoban-Finance
defaults. However, under Russian suretyship law DSK Autobann
has certain rights to raise defences to bondholder claims and therefore
to avoid or reduce its liability. The rating agency would ordinarily
expect to see bondholders protected from this exposure, typically
through an effective express waiver of these rights in the agreement itself.
However, Moody's understand any such waiver would not be enforceable
under Russian law.
While the rating agency recognizes that the surety is arguably as strong
a guarantee as can be given by a non-financial corporate in Russia,
this potential bondholder exposure is something Moody's considers
to be inconsistent with the equalization of the rating of Avtoban-Finance's
bonds with the rating of Autobann based solely on the strength of the
surety.
The irrevocable offers provided by Soyuzdorstroy and KhMDS entitle bondholders
to require both entities to enter into a purchase agreement for their
bonds if certain events occur, such as payment default by Avtoban-Finance
or its insolvency. In substance, the offer appears to be
similar to a put option. There are some uncertainties surrounding
the enforceability of put options under Russian law although there is
some evidence to suggest that the Russian legal system will uphold irrevocable
offers. Bondholders' claims under the irrevocable offer are in
any event subject to relatively tight timescales and formal notice requirements,
which could expose bondholders to a risk that their rights under the offer
may lapse whilst a potential default remains outstanding under the bonds
if they do not act quickly and accurately.
However, the assessment also positively considers that the credit
support providers' (DSK Autobann, Soyuzdorstroy and KhMDS) self-interest
in maintaining the creditworthiness and business viability of Avtoban-Finance
is quite substantial. While this interest does not fully mitigate
potential legal deficiencies in the surety and irrevocable offers,
it is sufficient for the bonds to be aligned with and uplifted to Autobann's
rating at the B1 level.
The factors considered were (1) the degree to which the operations of
the companies are interwoven; (2) the degree of business and financial
disruption that would result for Autobann or its corporate family if payments
by Avtoban-Finance are not made on time; and (3) the extent
to which the support package, while generally deficient in some
respects, still represents a relatively strong commitment within
the current limitations of Russian Law.
While the bond's rating is currently uplifted to Autobann's B1 rating,
a rating distinction might be introduced at higher rating levels to reflect
the fact that the terms of the support package do not fully achieve the
standards normally expected to align the rating with that of the support
provider based on the legal documents alone.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook on Autobann's B1 CFR reflects Moody's expectation
that the company will maintain stable construction volumes, and
that its business model will remain resilient to cost inflation risks.
The outlook assumes that the company's leverage measured by debt/EBITDA
will sustainably remain below 2.0x, and coverage measured
by EBITA/interest above 3.0x.
WHAT COULD CHANGE THE RATINGS UP/DOWN
Given the company's current scale of operations and limited diversification,
an upgrade in the medium term is unlikely. A continuing track record
of strong financial performance and conservative financial policies,
and maintenance of good visibility over future cash flows alongside conservative
liquidity management would have a positive effect on the ratings.
Autobann's rating could come under downward pressure if the company were
to face material deterioration in its business and financial profile,
with leverage measured by reported debt/EBITDA increasing above 2.0x,
and EBITA/interest falling below 3.0x.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Construction Industry
published in November 2014. Please see the Credit Policy page on
www.moodys.com for a copy of this methodology.
Headquartered in Moscow, Russia, Autobann (LLC Soyuzdorstroy)
is the second-largest Russian infrastructure construction company
in terms of contracts portfolio, specialising in road construction.
The company participates in the large-scale federal road construction
projects and regional projects in Urals, West Siberia, Central
and South Russia. In 2014, Autobann reported RUB24.9
billion in revenue and RUB3.3 billion in 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 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.
Julia Pribytkova
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
SUBSCRIBERS: 44 20 7772 5454
Victoria Maisuradze
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 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
SUBSCRIBERS: 44 20 7772 5454
Moody's assigns B1 rating to Autobann's debut rouble bonds
