Moscow, December 24, 2010 -- Moody's Investors Service has today assigned a Ba3 corporate family rating
(CFR) and a Ba3 probability of default rating (PDR) to Transoil LLC ("Transoil"),
a Russian major rail-based oil and oil products transportation
business. The rating outlook is stable. At the same time,
Moody's Interfax Rating Agency, which is majority-owned
by Moody's, has assigned an Aa3.ru national scale credit
rating ("NSR") to the company.
According to Moody's and Moody's Interfax, the Ba3 global scale
rating reflects Moody's expectations with regard to Transoil's global
default probability and loss recovery, while the Aa3.ru NSR
reflects the standing of the company's credit quality relative to its
The Ba3/Aa3.ru CFR assigned to Transoil mainly balances the high
industry and client concentration risks of the company's business
of a tank car operator with the advantages of its sustainable position
of one of the leaders in the rail-based oil and oil products transportation
segment that services Russia's strong oil industry. The rating
factors in the company's strong cash generation ability, relatively
low leverage measured by debt/EBITDA and cushion under most of its financial
metrics, which should allow to accommodate a somewhat limited visibility
of future dividend payments within the current rating.
In more details the ratings positively reflect: (i) the expected
sustainable demand for rail-based oil products transportation services
from the domestic oil industry; (ii) Transoil's solid market
position supported by its established relationships with a few large Russian
oil companies, modern tank car fleet and barriers for new market
entrants in terms of both client confidence and the scale of investments;
(iii) manageable leverage within the current rating going forward,
given the company's largely discretionary investment plans reasonably
covered by its solid operating cash flow; (iv) broadly conservative
financial profile and the management's commitment to cap leverage
at 1.2x unadjusted debt/EBITDA.
The ratings are constrained by: (i) high industry- and client
concentration of Transoil's business, thus vulnerable to oil
prices, developments of both the domestic oil industry and of the
few oil companies; (ii) increasing competition from the new oil and
oil products pipeline routes in the medium and particularly in the long
run and potentially from Russian Railways' spinoff Freight One,
which may pressure Transoil's transportation volumes and margins
going forward; (iii) limited visibility of the company's long-term
dividend policy and the risk of continued significant dividend payments
that may reduce the company's financial flexibility; (iv) a
relatively high Debt-to-Book-Capitalization ratio,
which may be risky, if the debt were to grow, contrary to
the company's current plan; (v) highly concentrated ownership
of the company, which creates the risk of quick shifts in its strategy
and development plans; (vi) generally higher risk and uncertainty
of operating in Russia's somewhat volatile legal, regulatory and
Transoil is well-positioned in the oil and oil products segment
of Russia's rail-based freight transportation market.
The company is a major tank car operator in Russia, the second largest,
after the universal rail car fleet operator Freight One, in terms
of tank car fleet size and oil and oil products transportation volumes.
At the same time, Transoil's market share in terms of the
transportation volumes is estimated at around 26%, which
is broadly comparable to that of Freight One. Transoil benefits
from the sustainable demand for its services from Russia's oil industry,
with the company's business having been resilient to the recent
crisis. However, the company's industry focus may limit
its business growth and margins in the long run, given the competitive
environment and limited growth prospects in the respective market segment,
while making the company exposed to oil prices and fluctuations of the
oil industry. Transoil's significant client concentration,
with three domestic oil companies accounting for around 80% of
its revenue, reinforces its overall concentration risk. Nevertheless
the latter is viewed as manageable within the current rating, taking
into account (i) the track record of the company's established relationship
with its key customers, (ii) its sustainable margins and strong
operating cash flow, which has been sufficient to fund its capex,
(iii) a relatively low leverage measured as 2.0x Debt/EBITDA and
(iv) strong interest and debt coverage metrics, with EBITA/Interest
at 5.2x and FFO/Net Debt at 40.7% (all the ratios
incorporate Moody's standard adjustments and are calculated on the
LTM H1 2010 basis).
Given its modern fleet and having reasonably invested in it, Transoil
sees its current capex programme (RUB15.7 billion for 2011-2013)
as almost fully discretionary. Transoil will implement the programme
depending on the market environment. No significant M&As in
addition to a related-party transaction to acquire a company that
has leased out its locomotives and tank cars to Transoil, are reportedly
under consideration. However in Moody's view, Transoil's
financial flexibility and evolution of its financial profile may be additionally
challenged by the dividend policy of its private shareholders.
Large dividend payments of the past have left the company with FCF negative,
though without damage to its business development or financial standing.
Moody's notes the risk of limited visibility of the dividend policy
going forward. In Moody's view, Transoil's ability
to maintain its financial profile and be financially flexible depends
on its shareholders' willingness to cap dividend requirements.
The agency notes that the company's RCF/Net Debt of around 17.4%
and Debt/Book Capitalization of 71% on the LTM H1 2010 basis are
weaker than expected from a Ba3-rated company in the emerging markets.
However, the agency understands that these ratios are manageable
by the company and planned to become more in line with the current rating
in the short term, with RCF/Net Debt to increase to around 30%
and Debt/Book Capitalization be down to around 60%. Moody's
takes some comfort from the management's commitment to a conservative
financial policy supported by the expected dividend payments at levels
which should allow the company to become FCF positive and develop without
new borrowings in line with the company's plans.
Transoil's liquidity is acceptable but dependent on its cash generation
ability, actual investments over the next 12 months compared to
the planned ones and dividend payments. The company does not have
committed long-term credit facilities, only a short term
revolving line to address short-term liquidity needs. The
company's cash reserves as of the beginning of Q4 2010 more than
covered its short-term debt obligations. The risk of increasing
dividend payments is somewhat mitigated by the company's investment
The stable rating outlook reflects our expectation that Transoil should
be able to maintain a financial profile commensurate with its current
rating in the 12-18 months.
The rating could be upgraded, should there be a sustainably growing
demand for rail-based oil and oil products transportation services
for the company to diversify its client base, ensure a long-term
business growth and increase its cash flow generation, with the
EBITA margin around 20%, robust positive free cash flow,
Debt to EBITDA of materially below 2.0x and RCF to Net Debt of
The rating would be under pressure should the company happen to lose any
of its few major clients or market fundamentals become weaker and Transoil's
cash generation ability deteriorate, with (i) EBITA margins falling
materially below 13%, (ii) Debt/EBITDA trending towards 2.5x
and above; (iii) RCF/Net Debt decreasing materially below 30%.
The group's shareholders deviation from its plan to cap dividend payments
and, as a result, the company's failure to have RCF/Net
Debt improved to 30% would negatively affect the rating.
Pressure on liquidity profile would put downward pressure on the rating
Transoil's rating was assigned by evaluating factors we believe
relevant to its credit profile, including i) the business risk and
market position within key business segments; ii) management's strategy,
iii) the financial profile, and iv) the 2009 and H1 2010 performance
and projections over the near to intermediate term. These attributes
were compared against other companies both within and outside of Transoil's
key business segment and Transoil's ratings are believed to be comparable
to those of other issuers of similar credit risk.
Headquartered in St. Petersburg, Transoil is one of Russia's
largest tank car operators, privately owned, with RUB50.7
billion (USD1.6 billion) in revenues in 2009.
Moody's Interfax Rating Agency's National Scale Ratings (NSRs) are
intended as relative measures of creditworthiness among debt issues and
issuers within a country, enabling market participants to better
differentiate relative risks. NSRs differ from Moody's global scale
ratings in that they are not globally comparable with the full universe
of Moody's rated entities, but only with NSRs for other rated debt
issues and issuers within the same country. NSRs are designated
by a ".nn" country modifier signifying the relevant
country, as in ".ru" for Russia. For further
information on Moody's approach to national scale ratings, please
refer to Moody's Rating Implementation Guidance published in August 2010
entitled "Mapping Moody's National Scale Ratings to Global Scale
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in Russia. MIRA is controlled by Moody's Investors Service,
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Vice President - Senior Analyst
Corporate Finance Group
Moody's Eastern Europe LLC
Telephone: +7 495 228 6060
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Eric de Bodard
MD - Corporate Finance
Corporate Finance Group
Moody's France SAS
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Moody's assigns Ba3 rating to Transoil, stable outlook
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