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Rating Action:

Moody's assigns B1 rating to Autobann's proposed rouble bonds; stable outlook

21 Apr 2017

London, 21 April 2017 -- Moody's Investors Service has today assigned a B1 rating (with a loss-given default assessment of LGD4) to the proposed RUB3 billion senior unsecured rouble-denominated bonds due in 2024 to be issued by the Russian road construction company Autobann (LLC SOYUZDORSTROY) via its subsidiary Avtoban-Finance, JSC. The outlook on the rating 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. Moody's expects that the issuance proceeds will be mostly used for repayment of part of the group's existing debt.

RATINGS RATIONALE

The B1 rating assigned to the domestic bond is in line with Autobann's B1 corporate family rating (CFR), which reflects its (1) small scale relative to its global peers; (2) reliance on the Russian road construction market, which is under ongoing pressure from the constrained state budget; (3) high project and customer concentration; (4) in-year liquidity volatility, with costs incurred throughout the year but contract receipts clustered towards the end of each year; and (5) corporate governance risks associated with the company's single shareholder structure.

More positively the rating takes into account Autobann's (1) low risk business model, whereby most projects relate to the construction of important federal roads and are performed under contracts with state bodies; (2) 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; (3) good visibility of future revenue and cash flows owing to its healthy order backlog and solid bidding opportunities even during down-cycles; (4) conservative approach to project evaluation and track record of successful project completion.

Despite some step up in leverage following the shift to longer-term debt financing and weaker operating margins, the company preserves healthy financial and liquidity profile supported by conservative financial policies, modest and flexible investment needs and meaningful backup liquidity provided by banks against state-funded contracts.

STRUCTURAL CONSIDERATIONS

The B1 senior unsecured rating assigned to Avtoban-Finance's proposed RUB3 billion domestic bonds is at the same level as Autobann's CFR, which reflects Moody's assumptions that (1) the bonds will rank pari passu with other unsecured and unsubordinated obligations of Autobann; and (2) there is no material debt secured with tangible assets in the company's total debt.

The bondholders will benefit from 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.

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.

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.

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 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.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook on Autobann's B1 CFR reflects our expectation that the company's business model will remain largely resilient to the economic down cycle and cost inflation risks and that it will maintain stable construction volumes and adequate profitability. The outlook assumes that the company's leverage measured by reported debt/EBITDA will sustainably remain at or below 2.0x, and coverage measured by EBITA/interest at or 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 substantially above 2.0x, and EBITA/interest falling materially below 3.0x, both on sustainable basis.

PRINCIPAL METHODOLOGY

The principal methodology used in this rating 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, 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 large-scale federal road construction projects as well as regional projects. In 2015, Autobann reported RUB27.6 billion in revenue and RUB2.7 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 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
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:
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JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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