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.
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United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
