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Rating Action:

Moody's changes MÁV's rating outlook to negative

Global Credit Research - 26 Jul 2010

Milan, July 26, 2010 -- Moody's Investors Service has today changed to negative the outlook on the Ba2 Corporate Family Rating (CFR) and Probability of Default Rating (PDR) of MÁV Zrt Hungarian State Railways (MÁV).

The rating action follows Moody's decision on 23 July 2010 to place the Baa1 local and foreign currency ratings of the Republic of Hungary on review for possible downgrade.

The negative outlook on MÁV's ratings reflects Moody's view that the government might be more constrained in its level of support going forward at time when MÁV's liquidity remains under pressure due to the sizeable debt repayments due in 2011 (as outlined in Moody's last press release on MÁV dated 28 June 2010). The outlook could be stabilized if the pressure on the sovereign rating is removed (i.e. upon the confirmation of the existing Baa1 rating) and the concerns on the company's liquidity profile and refinancing risk subside. Although a multi-notch downgrade on the government ratings is unlikely, in such event there might be immediate pressure on MÁV's rating as well.

The Ba2 rating of MÁV reflects the combination of the following inputs:

- BCA of 17 (on a scale of 1 to 21, where 1 represents the lowest credit risk and 17 equates to Caa1)

- Hungary's sovereign rating of Baa1, which is currently under review for possible downgrade

- Very high dependence

- High support

Moody's assessment of very high dependence recognises (i) the strong operational and financial linkages between MÁV and the Hungarian Government with direct and indirect government transfers representing more than 50% of MÁV's revenues, (ii) the fact that both the company and its sole shareholder rely on Hungary as revenue base and (iii) the exposure of MÁV and the government to common risks such as exchange rate volatility.

Moody's assessment of high support reflects (i) MÁV's critical role in the Hungarian economy; (ii) its 100% state ownership; and (iii) its tight control by the Hungarian state, with government-nominated representatives dominating its Board of Directors and Supervisory Board. Although the Hungarian government does not explicitly guarantee MÁV's obligations, notwithstanding its non-interventionist history, it currently provides significant support to MÁV in the form of equity contributions, loan guarantees (a large portion of MÁV's debt is supported by Government guarantee), cost reimbursement and subsidies. Therefore, Moody's believes it is likely that Hungary would bail out MÁV if the group were to default in the near future.

The BCA of 17 positively reflects: (i) the company's low business risk profile, based on both its monopoly position as the Hungarian railways' infrastructure manager and its "quasi-monopoly" position in railway passenger transportation in Hungary; (ii) the relatively stable stream of revenues derived by MÁV from state cost reimbursements; (iii) the importance of railways as a means of transportation to the Hungarian economy; and (iv) the high degree of control and monitoring of MÁV by the Hungarian government.

MÁV's BCA of 17 is lower than the indication provided by Moody's Global Passenger Railway Companies Rating Methodology (published in December 2008) at Ba2 on the basis of FY2009 financial data, as adjusted by Moody's. A BCA of 17 reflects the following constraints: (i) MÁV's weak stand-alone credit quality derived from its record of material operating losses; (ii) the likely continued deterioration in MÁV 's financial position based on further significant capital expenditure (capex) commitments (although Moody's understands that capex is implemented only when the company is able to fund it) and higher future maintenance costs for an ageing fleet (although Moody's recognizes that the company has started to renew its fleet); (iii) MÁV's heavy debt repayment schedule, starting in 2011, and the group's weakening liquidity position as a result of this; and (iv) a change in the stability of the operating environment due to the financial crisis.

The last rating action on MÁV was implemented on 28 June 2010, when Moody's downgraded the group's CFR to Ba2 with a stable outlook from Ba1.

The principal methodologies used in rating MÁV were "The Application of Joint Default Analysis to Government Related Issuers", published in October 2005 and updated in July 2010 as "Government-Related Issuers: Methodology Update", and "The Global Passenger Railway Companies Rating Methodology", published in December 2008, and available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

Headquartered in Budapest, Hungary, MÁV is 100% government-owned and the country's vertically integrated incumbent national railway operator. In FY2009, MÁV reported revenues of HUF121.5 billion (around EUR433 million) and received HUF164 billion in reimbursements from the government.

London
Paloma San Valentin
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Milan
Marco Vetulli
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
Telephone:+39-02-9148-1100

Moody's changes MÁV's rating outlook to negative
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