London, 20 December 2012 -- Moody's Investors Service has today assigned a definitive rating
of Baa3 to a RUB17.5 billion 8.446% loan participation
notes (LPN) due 2019, which are the first LPN issue under a (P)Baa3-rated
100 billion LPN programme by, but with limited recourse to,
Federal Grid Finance Limited, a special purpose vehicle, incorporated
in Ireland, of JSC FGC UES (FGC, Baa3 stable). The
notes under the programme are issued for the sole purpose of financing
loans to FGC (under a facility agreement with Federal Grid Finance Limited).
The outlook on the rating is stable.
RATINGS RATIONALE
The Baa3 rating assigned to the first LPN issue, similar to that
of the (P)Baa3 rating of the LPN programme, reflects the Baa3 issuer
rating of FGC. Federal Grid Finance Limited will issue from time
to time such notes under the programme for the sole purpose of financing
loans to FGC and therefore the noteholders rely solely on FGC's creditworthiness
to service and repay the debt. FGC's obligations under the respective
loans are assumed to rank pari passu with all its other unsecured and
unsubordinated financial indebtedness (apart from any obligations mandatorily
preferred by law). The noteholders will benefit from certain covenants
made by FGC in the underlying facility agreement, including a negative
pledge and restrictions on mergers and disposals. The notes also
contain a change of control clause should the Russian Federation cease
to own or control (directly or indirectly) in excess of 50% of
the issued and outstanding voting share capital of FGC. FGC will
use the proceeds of the respective loans in the ordinary course of its
business.
Moody's definitive rating on the first LPN issue confirms the provisional
rating assigned to it on 27 November 2012. Moody's rating rationale
was set out in a press release issued on that date as follows.
Moody's regards FGC, the Russian transmission as a government-related
issuer (GRI). In accordance with Moody's GRI rating methodology,
the Baa3 issuer rating of FGC, the (P)Baa3 rating of the LPN programme
and the Baa3 rating of the first LPN issue reflect the combination of
the following inputs: (1) the company's baseline credit assessment
(BCA) -- a measure of its standalone credit quality --
of ba; (2) the Baa1 local-currency rating of the Russian government;
(3) Moody's assessment that there is "high" default dependence between
FGC and the Russian government; and (4) Moody's view that FGC would
benefit from "strong" government support in a financial distress.
On 23 November 2012, Moody's downgraded FGC's issuer rating to Baa3
from Baa2. The downgrade reflects Moody's view that the Russian
government will distance itself from FGC in the course of the restructuring
of the Russian grid sector in line with a Decree on OJSC Russian Grids
(Russian Grids) of the President of Russia, published on 22 November
2012. Specifically, the one-notch downgrade of FGC's
issuer rating reflects Moody's belief that this restructuring will reduce
the probability that the government will provide extraordinary support
to the company in a distress situation. Moody's adjusted downwards
the probability of state support factored into the company's issuer rating
to "strong" from "high", which reduced the uplift to the BCA,
albeit it remains unchanged at ba.
In June 2012, the Russian government transferred JSC IDGC Holding
(IDGC Holding, Ba1 developing), the holding company for a
few major regional and interregional distribution grid companies,
under management of FGC, the Russian transmission grid business.
However, thereafter, the government has been working out a
new strategy for the development of the grid sector, including a
further alliance of the two entities. In accordance with the mentioned
Presidential Decree, the grid sector is now to be consolidated on
the basis of IDGC Holding. The government will transform IDGC Holding,
which will be renamed Russian Grids, into a management company for
distribution grid businesses and FGC's transmission grid business.
The management company will direct the development of the domestic grid
sector to increase the quality and reliability of services, control
costs and interlink investments in transmission and distribution grids.
The government will contribute its stake in the FGC to the management
company. As a result, the government's direct ownership of
FGC will be replaced by an indirect one.
Moody's expects the government's effective ownership and control over
FGC through the management company to be materially below the 75%
plus one share currently required under Russian law. Moody's understands
that the Presidential Decree requires the government's effective control
over FGC to be at least 50% plus one share and requests that a
shareholder agreement between the government and Russian Grids be developed,
which will enable the government to maintain control over FGC's operations.
However, the rating agency considers that the planned change to
FGC's ownership structure and position in the corporate framework of the
state-controlled grid sector will distance the company from the
government and complicate their interaction. Moody's would expect
this to reduce the probability of extraordinary state support in a distress
situation.
FGC's ba BCA remains constrained by the evolving regulatory regime in
the Russian grid sector, its changing configuration and the company's
significant investment programme, which exerts pressure on its financial
profile. However, the sustainability of the company's regulated
and strategically important business as the national transmission grid
operator continues to underpin the BCA.
OUTLOOK
The stable outlook on the Baa3 rating of the first LPN issue under the
LPN programme, similar to the stable outlook on the programme's
(P)Baa3 rating, reflects the stable outlook on FGC's issuer rating,
which, in turn, considers that the Presidential Decree contains
a reasonably detailed plan of the grid sector restructuring. In
Moody's view, the plan highlights the Russian government's clear
intention to maintain control over FGC, and the rating agency would
expect state support for the company to remain strong. Moody's
notes that there are execution risks associated with the plan.
The agency also notes uncertainties associated with the evolving regulation
and the government's developing strategy for the grid sector. However,
the outlook reflects Moody's expectation that the steps outlined in the
Presidential Decree will be executed in the coming months in a way that
does not negatively affect FGC's business and financial risk profile.
WHAT COULD CHANGE THE RATING UP/DOWN
An upgrade of the rating of the LPN programme and the first LPN issue
would require an upgrade of FGC's issuer rating, which Moody's considers
to be unlikely at this stage given the above mentioned execution risks
and uncertainties.
Negative pressure on the rating of the LPN programme and the first LPN
issue would arise from negative pressure on FGC's issuer rating,
which could result from (1) unexpected changes to the new restructuring
plan or its implementation, signalling weakening support from the
government; (2) a negative shift in the developing regulatory regime
and deteriorating margins; (3) a failure of the company to manage
its investment programme in line with the tariff regulation and contain
a deterioration of its financial profile, with funds from operations
(FFO) interest coverage and FFO/net debt falling materially and persistently
below 3.5x and 25%, respectively; (4) pressured
liquidity.
PRINCIPAL METHODOLOGIES
The methodologies used in this rating were Regulated Electric and Gas
Networks published in August 2009, and Government-Related
Issuers: Methodology Update published in July 2010. Please
see the Credit Policy page on www.moodys.com for a copy
of these methodologies.
Headquartered in Moscow, Russia, JSC Federal Grid Company
of Unified Energy System (JSC FGC UES) is the monopoly electricity transmission
system operator in the Russian Federation. The company's revenues,
approximately 96.5% of which are transmission revenues fully
regulated by the state, amounted to RUB139.6 billion (around
$4.7 billion) in 2011 (other operating income of RUB7.8
billion, primarily from non-core activities, is not
included). The Russian government currently directly owns 79.55%
of the company's ordinary shares.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant 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 relevant 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 relevant 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.
The rating has been disclosed to the rated entity or its designated agent(s)
and issued with no amendment resulting from that disclosure.
Information sources used to prepare the rating are the following :
parties involved in the ratings, parties not involved in the ratings,
public information, and confidential and proprietary Moody's
Investors Service information.
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Ekaterina Botvinova
Vice President - Senior Analyst
Infrastructure Finance
Moody's Interfax Rating Agency
7th floor, Four Winds Plaza
21 1st Tverskaya-Yamskaya St.
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Russia
Telephone: +7 495 228 6060
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Monica Merli
MD - Infrastructure Finance
Infrastructure Finance
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Moody's assigns Baa3 rating to the first issue of FGC's notes; stable outlook
