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Related Issuers
Rating Action:

Moody's changes Eastcomtrans LLP's outlook to positive and affirms B3 CFR

21 Feb 2020

London, 21 February 2020 -- Moody's Investors Service, ("Moody's") has today changed to positive from stable the outlook of Eastcomtrans LLP (ECT) and has affirmed the company's B3 corporate family rating (CFR), B3-PD probability of default rating (PDR), and B3 senior secured rating of its outstanding notes. Concurrently, Moody's has upgraded to Ba3.kz from B1.kz ECT's national scale corporate family rating.

RATINGS RATIONALE

Today's rating action reflects ECT's strengthened operating and financial performance after the crisis of 2015-16, which, along with the market recovery, was underpinned by the company's improving business profile and balanced financial policy.

In particular, to reduce its historically high business and customer concentration, since 2017, ECT has been gradually (1) developing freight rail operator and logistics services; (2) replacing some of its tank cars with open cars, which help to better balance the market dynamics in different segments; and (3) developing its business in the large Russian market. As a result of ECT's efforts to strengthen its operating profile and supported by the stabilised macroeconomic environment in Kazakhstan, the company restored its revenue and adjusted EBITDA in tenge terms (the company's reporting currency) to above the pre-crisis levels, while preserving sound profitability. At the same time, the growth in US dollar terms was largely offset by the persistently weak domestic currency with earnings remaining well below the 2014 levels.

In 2020, Moody's expects a gradual improvement in market tank car rates, coupled with the long-term contract with its largest customer, Tengizchevroil LLP (TCO), successfully renewed in October 2019, to partly offset the developing pressure on ECT's earnings and profitability stemming from (1) the ongoing volatility in the tenge exchange rate; (2) weaker rates for open cars; and (3) rising costs for railcar maintenance and repairs. Overall, ECT will likely preserve its high Moody's-adjusted EBITDA margin of around 70%, while its revenue could continue to grow at a double-digit rate in percentage terms, supported by potential new fleet acquisitions during the period.

ECT's improved operating performance helped the company to strengthen its financials with Moody's-adjusted debt/EBITDA decreasing to 2.0x as of 30 September 2019 from 2.4x as of year-end 2018 and 4.4x in 2015-16, which is also below the pre-crisis levels (2.6x in 2013 and 2.7x in 2014). ECT's financial profile is also underpinned by its adherence to a balanced financial policy including (1) a conservative approach to business development and shareholder distributions; and (2) focus on a gradual reduction of revenue-debt currency mismatch, which was the key driver of the company's financial distress during 2015-16 (the share of US-dollar-denominated debt decreased to 53% in 2019 from around 80% in 2014-15).

In 2020-21, despite the resumed dividend payouts and potentially more aggressive debt-financed acquisitions of new fleet (the actual size of which will depend on the market conditions, the existing long-term contracts with customers, and available funding), Moody's expects the company's reported debt/EBITDA to stay well below its internal cap of 3.5x. Moody's also expects ECT to continue to reduce its foreign-currency risk via reducing the share of foreign currency-denominated debt to around 20%-30% by year-end 2020 to better balance the company's revenue structure, around 25% of which is denominated in foreign currency.

ECT's liquidity will remain supported by its (1) strong cash flow generation and comfortable debt maturity profile; as well as (2) proven track record of established relationships with international financial institutions and local banks, in particular, evidenced by the successful resolution of the issue related to the covenant breaches under various debt facilities, which the company incurred in 2016 through Q1 2018, while still preserving access to new funding. As of the end of September 2019, the company fully complied with all of its covenants, which include leverage and coverage metrics, and Moody's expects it to remain in compliance in 2020.

ECT's ratings, however, remain constrained by its (1) very small size on a global scale; (2) still material, although gradually declining, mismatch between the currency of debt (mainly the US dollar) and the volatile currency of operations (the Kazakhstani tenge); (3) still high customer concentration in TCO, partly mitigated by ECT's established relationship and long-term contracts with this customer; and (4) exposure to the volatile railcar lease rates and the developing operating and macroeconomic environment in Kazakhstan (Baa3 positive).

ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) CONSIDERATIONS

ECT has a concentrated ownership structure, which increases certain corporate governance risks, with 93.33% of the company directly and indirectly controlled by Marat Sarsenov. At the same time, Moody's positively acknowledges ECT's balanced financial policy and conservative approach to business development and shareholder distributions. The risk of concentrated ownership is also mitigated by the presence of International Finance Corporation (Aaa stable), which owns a 6.67% stake in the company.

RATING OUTLOOK

The positive outlook reflects ECT's strong positioning within the current rating category and the possibility of an upgrade over the next 12-18 months.

WHAT COULD CHANGE THE RATING -- UP/DOWN

Moody's could consider an upgrade of ECT's ratings if the company (1) continues to build a track record of stable operating performance and sound profitability; (2) reduces its revenue-debt currency mismatch; and (3) retains Moody's-adjusted debt/EBITDA at around or below 2.5x through the cycle and below 3.5x at peaks, while maintaining EBITDA/interest at around or above 5.0x and funds from operations (FFO)/debt at around or above 30% on a sustainable basis. Moody's would also assess and take into account ECT's dependence on contractual arrangements with its largest customer, TCO, at the time of an upgrade.

Moody's could downgrade ECT's ratings if its operating performance, market position, financial profile or liquidity deteriorate materially.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Equipment and Transportation Rental Industry published in April 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Moody's National Scale Credit 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 credit 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 ".za" for South Africa. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in May 2016 entitled "Mapping National Scale Ratings from Global Scale Ratings". While NSRs have no inherent absolute meaning in terms of default risk or expected loss, a historical probability of default consistent with a given NSR can be inferred from the GSR to which it maps back at that particular point in time. For information on the historical default rates associated with different global scale rating categories over different investment horizons, please see http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1174796.

Eastcomtrans LLP (ECT) is one of the largest private companies in Kazakhstan, specialising in leasing and operating freight railcars. The company derives around 65% of its revenue from operating lease agreements for railcars and the rest from providing rail transportation and other related services. For the 12 months ended 30 September 2019, ECT's revenue was KZT37.5 billion (around $99 million) and EBITDA was KZT28.5 billion (around $75 million).

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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
Vice President - Senior 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

Artem Frolov
VP - Senior Credit Officer
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
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Client Service: 44 20 7772 5454

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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