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Rating Action:

Moody's assigns first-time Ba1 rating to DME; outlook positive

31 Jan 2018

London, 31 January 2018 -- Moody's Investors Service has assigned a first-time non-investment grade Ba1 corporate family rating (CFR) and Ba1-PD probability of default (PDR) rating to DME Limited (Domodedovo) (DME), the owner and operator of the second largest airport in Russia. Concurrently, Moody's has also assigned a Ba1 rating with a loss given default assessment of LGD4 to the proposed senior unsecured USD loan participation notes (LPNs) to be issued by, but with limited recourse to, DME Airport DAC, an orphan vehicle incorporated under the laws of Ireland. The outlook on the ratings is positive.

RATINGS RATIONALE

The Ba1 rating reflects DME's position as the second largest airport in a large and growing Moscow Air Cluster (MAC), the major gateway to Russia and The Commonwealth of Independent States (CIS). The competition in the catchment area is, however, high with the presence of other two large airports, Sheremetyevo and Vnukovo.

In particular, in 2015, DME lost the leadership to its key competitor, Sheremetyevo, a hub for the national flag carrier and the clear market leader, Aeroflot Group. Apart from the overall weak economic conditions and rouble depreciation, which pressured outbound travel in 2015-16, DME's competitive position has been affected by a number of adverse factors such as: (1) bans on air travel to Ukraine, Turkey, and Egypt in autumn 2015, with the latter two historically accounting for a significant share of the airport's non-regular flights; (2) optimisation of capacity in response to the downcycle by foreign carriers, to which DME has high exposure; and (3) the exit of Transaero in end-2015, the second-largest client at that time, and the third-largest Vim-Avia in October 2017.

Nevertheless, DME retained a fairly resilient operating performance, although behind the market. In 2015-16, its passenger numbers went down by 8% and 7%, respectively, and in 2017 resumed growth rising by around 8% on the back of the stabilising economy and the reopening of flight toTurkey in August 2016. Moody's expects DME to sustain single-digit growth in the medium-term, while the potential reopening of charter flights to Egypt may further boost its traffic.

Overall, although the ambitious long-term expansion programmes by the major airports in the area should intensify competition in the coming years, DME should be able to preserve its strong market position supported by: (1) the vast MAC market with solid growth potential; (2) DME's well-developed airport and transport infrastructure with the largest runway capacity and a sizable land bank located in the area with low population density, which limits physical or legal/regulatory constraints for future development; (3) a diversified carrier base and a high proportion of origin and destination traffic; and (4) its wide service offering and competitive pricing.

DME is also now at the final stage of a sizeable expansion programme, which, among others, includes the construction of a new terminal for international flights due to open before the 2018 Football World Cup. Moreover, in 2Q 2018, the Russian government will commission for DME a new runway to replace one of the existing two, as well as reconstruct the existing aprons and build new ones. As a result, DME will improve its service offering and will have sufficient capacity headroom to accommodate the expected market growth in the medium-term, while tripling the retail area, which it historically lacked. In the longer term, DME may consider construction of the third runway and further expansion of its terminal and other airport facilities; however, these investment plans remain highly flexible and modular.

The rating also takes into account the tariff liberalisation in the MAC in February 2016, which allows DME a certain flexibility to keep adequate level of earnings and margins in a competitive market, although the limited track record of the new light-handed regime and still evolving regulatory environment in Russia provides some risks of potential re-introduction of state regulation. Overall, in 2018-19, Moody's expects DME's revenue to grow at a double-digit percent rate, further supported by: (1) the substantial increase in high-margin commercial revenue following the opening of the new terminal and parking in 2Q 2018; and (2) the expected increase in passenger traffic. The company's profitability should also improve to its historical levels at reported EBITDA margin of above 40% after some decrease in 2015-17 largely driven by the drop in the more profitable international traffic.

Furthermore, DME's rating is supported by its strong financial profile through the industry and investment cycles and despite a fairly shareholder-friendly financial policy. In particular, in 2016, although the airport significantly scaled up its capital expenditure and paid out substantial dividends, its adjusted leverage (measured as FFO/debt) stayed healthy at above 20%. DME also retained a comfortable cash balance and stayed well in compliance with its financial policy with the reported net debt/EBITDA at around 1.6x vs. the internal leverage target of net debt/EBITDA of below 3.0x.

In 2017-18, whereas the investment will peak at around RUB15 billion per year, DME's adjusted leverage will remain stable at around 20%, supported by the improving operating performance and modest dividend payout plans. In 2019, as the company's capital expenditure moderates and it resumes positive free cash flow generation, DME will start gradual deleveraging with adjusted FFO/debt trending towards 30%.

Although DME is exposed to foreign-exchange risks as the majority of its debt is denominated in foreign currency, it also generates around 50% of revenue in US dollars and Euro, which provides some natural hedge. Moreover, under its financial policy, DME holds most of its cash balance in foreign currency.

DME's credit profile also benefits from a strong liquidity position driven by a substantial cash balance available as of end 2017, and a track record of uninterrupted access to domestic and international capital markets and bank funding. Moody's expect DME to successfully refinance the outstanding $221.5 million notes due in November 2018 with the issue of the upcoming new Eurobond, following which the company will have a very comfortable debt maturity profile with no major debt repayments until November 2021.

At the same time, the rating is constrained by the evolving regulatory environment and an overall less developed legal, political and economic framework in Russia which increases risks of potential state interference. It also exposes DME to legal risks, particularly in view of the fairly recent criminal investigation against the company's shareholder, which was, however, successfully resolved in 2016. As a single shareholder company, DME also has weaker corporate governance standards which heightens the risk of elevated shareholder distributions.

DME's rating is strongly positioned at Ba1 and is currently constrained by Russia's government bond rating and its outlook, due to the company's predominant exposure to the health of the Russian domestic economy, lack of revenue diversification outside of the country and its exposure to domestic regulatory oversight.

STRUCTURAL CONSIDERATIONS

DME Airport DAC will issue the notes for the sole purpose of financing a loan to Hacienda Investments Ltd, a wholly owned subsidiary of DME Limited, which owns substantially all of the company's real estate assets, pursuant to a loan agreement between the two companies. The loan will be guaranteed by DME Limited and its major operating subsidiaries, which account for more than 85% of the group's consolidated EBITDA and assets. Noteholders will only have limited recourse to the issuer and will rely solely on DME's credit quality to service and repay the debt.

The issuance proceeds will be primarily used for repayment of the outstanding $221.5 million notes due in November 2018 and for general corporate purposes.

The notes' rating of Ba1 is at the same level as DME's rating, which reflects Moody's assumption that: (1) the notes will rank pari passu with other unsecured and unsubordinated obligations of DME's group; and (2) the company has no secured debt in its capital structure.

RATIONALE FOR THE POSITIVE OUTLOOK

The positive outlook is in line with the positive outlook on the sovereign rating. The outlook also reflects Moody's expectation that the company will maintain sound financial and liquidity profiles and preserve its strong market position, while delivering on operating targets and successfully completing its investment programme.

WHAT COULD CHANGE THE RATINGS UP/DOWN

The rating could be upgraded, subject to an upgrade of Russia's government bond rating, provided there is no material deterioration in company-specific factors, including its operating and financial performance, from current levels.

The downgrade risk is currently remote, given the positive outlook on the rating. A negative pressure on the rating could develop if DME's financial profile were to weaken as a result of, among others, (1) substantial deterioration in the company's competitive position resulting in a weak traffic performance; (2) aggressive debt-financed dividend payouts or other substantial shareholder distributions; (3) material adverse changes to the regulatory framework. Moody's would also consider downgrading the ratings in the event of major impediments to the completion of its investment programme or increasing concerns related to political, legal risks or corporate governance. A significant deterioration of the company's liquidity profile including failure to refinance the upcoming bond maturity in 2018 could also exert downward pressure on the rating. The rating is likely to be downgraded if there is a downgrade of Russia's sovereign rating.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Privately Managed Airports and Related Issuers published in September 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

DME Limited (Domodedovo) (DME) is the owner and operator of Domodedovo international airport located near Moscow, the second largest airport in Russia and Eastern Europe in terms of passenger and cargo volume with around 31 million passengers handled in 2017. In 12 months ended 30 June 2017, DME generated around RUB38.7 billion of revenue and RUB16.5 billion of adjusted EBITDA. DME is ultimately controlled by Dmitry Kamenshchik.

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
Client Service: 44 20 7772 5454

Victoria Maisuradze
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 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
Client Service: 44 20 7772 5454

No Related Data.
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