London, 06 May 2020 -- Moody's Investors Service ("Moody's") has today placed on review for downgrade
the Ba3 corporate family rating (CFR) and Ba3-PD probability of
default rating (PDR) of TransContainer PJSC (TransContainer), the
leading rail container transportation company in Russia. TransContainer's
outlook has been changed to ratings under review from stable.
RATINGS RATIONALE / FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE
OF THE RATINGS
The rating action reflects Moody's expectations that TransContainer will
operate with credit metrics that might not be at levels commensurate with
its current rating going forward amid the coronavirus-induced economic
downturn and under the new ownership structure, following the consolidation
of a 99.6% stake in the company by Delo LLC (Delo) in April
2020. The evolving economic downturn driven by the unprecedented
spread of the coronavirus outbreak, which Moody's regards
as a social risk under its ESG framework, given the substantial
implications for public health and safety, will exert pressure on
the company's operating and financial performance. The negative
effect would be amplified by an increase in its dividend payouts and debt
should Delo push down to the company part of its own debt raised to fund
the acquisition of TransContainer, which Moody's regards as
corporate governance risks. The company is also in the process
of raising additional sources of liquidity to fund the rising dividends.
The review for downgrade will focus on the assessment of the effect on
TransContainer's earnings, credit metrics, free cash
flow and liquidity, resulting from (1) the likely decline in demand
for freight rail transportation services amid the coronavirus-driven
economic downturn; (2) the expected push-down of part of Delo's
debt to TransContainer; and (3) the increase in the company's
dividend payouts.
Delo acquired the 99.6% stake in TransContainer for around
RUB120 billion, 70% of which was funded with bank debt.
Following the change of controlling shareholder, TransContainer's
dividend payout target will likely be raised from the current 25%
of net income under Russian accounting standards, and its internal
net debt/EBITDA cap has already been increased to 3.0x from 2.5x.
Moody's also expects that part of Delo's debt will be pushed
down to TransContainer in 2020-21, subject to the formal
completion of the remaining minorities buy-out procedure by Delo.
Moody's expects that Delo as a strategic investor will pursue an
overall balanced financial and operational strategy for TransContainer,
and will develop the company's potential operational synergies with
other transport and logistics businesses of the Delo group. However,
uncertainty related to the final structure and timing of the debt push-down,
as well as TransCointainer's lack of a track record of operating
under the new ownership structure, including its ability to consistently
adhere to the new financial policy, which Moody's would view
as fairly balanced, and prudent corporate governance practices,
pose risks. Corporate governance risk is, however,
mitigated by the fact that six out of 11 members on TransContainer's
new board of directors are independent.
The rail container transportation volume in Russia continued to grow in
Q1 2020, with TransContainer's transportation volume expanding
by 10%. However, the rapidly unfolding economic recession
and global trade disruptions amid the unprecedented spread of the coronavirus
outbreak, along with the material rouble depreciation reducing imports,
will likely strain the company's operating performance and earnings
starting from Q2 2020. Moody's now expects GDP in Russia
to contract by 5.5% in 2020, while the prospects and
path of recovery remain highly uncertain for the economy and for the company.
The potential further decline in prices for container operator services,
which started in late 2019, and increasing empty runs driven by
imbalances in container cargo flows across market segments (i.e.,
domestic transportation, exports, imports and transit) will
also exert pressure on TransContainer's earnings.
As a result of lower earnings, combined with an increase in debt
because of TransContainer's involvement in the funding structure
of its acquisition by Delo and the need to finance the company's
higher dividend payouts along with expansion capital investment,
TransContainer's historically strong financial metrics may deteriorate
materially beyond the levels commensurate with its current rating,
with its Moody's-adjusted debt/EBITDA potentially rising
above 4.0x over the next 12-18 months from 1.3x in
2019.
Moody's estimates that as of 31 March 2020, TransContainer's
cash balance of RUB6.5 billion together with operating cash flow
which the rating agency expects the company to generate over the next
12 months would be sufficient to cover its moderate debt repayments of
RUB3.5 billion. However, TransContainer will require
external funding to finance its substantial investments and increasing
dividend payouts. Although the company has already cut back on
its investment programme for 2020 in response to the evolving economic
downturn, its planned investments in fleet expansion remain fairly
high. While TransContainer's investment programme remains fairly
flexible, its ultimate ability to adjust dividend payouts in case
of the evolving liquidity pressure remains uncertain.
TransContainer's current rating factors in the company's solid
business profile with (1) strong competitive advantage as a reliable leading
market participant, despite the relatively small size on a global
scale; (2) integrated operating model, with a large and balanced
asset base; (3) diversified customer base; and (4) prudent operating
strategy, focused on improving its competitive position and efficiencies
with tight cost control.
An upgrade of TransContainer's rating is unlikely over the next 12-18
months, given the review for downgrade. Over time,
Moody's could consider an upgrade if the company (1) continues to demonstrate
strong operating and financial performance; and (2) maintains leverage
below 2.5x, solid interest and debt coverage metrics,
and strong liquidity at all times, including during an active investment
phase.
Before placing the rating on review Moody's had indicated that TransContainer's
rating could be downgraded if its liquidity, or operating and financial
performance materially deteriorate, with Moody's-adjusted
debt/EBITDA trending towards 3.0x on a sustained basis.
Increasing concerns over any transformational change in the company's
business structure and financial policy with uncertain or negative consequences
on its credit profile may also strain the rating.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) CONSIDERATIONS
Moody's considers environmental risks for the surface transportation
and logistics industry elevated, reflecting a gradual tightening
of environmental regulations and emissions standards, as well as
its exposure to (1) heavy usage of diesel fuel; (2) natural disasters
and rail accidents (such as derailments of rail tank cars with oil or
other hazardous materials); and (3) lower demand for bulk freight
that is exposed to environmental risks. At the same time,
given the specifics of TransContainer's operator business model,
Moody's does not expect the company to incur any material environmental
spending, which may have an impact on its credit metrics.
Moody's also expects the company to follow all environmental standards
to ensure compliance with the requirements under the Russian law and technical
standards.
Moody's regards the coronavirus outbreak as a social risk under its ESG
framework, given the substantial implications for public health
and safety.
Governance considerations include TransContainer's concentrated private
ownership structure, which creates a risk of rapid changes in the
company's strategy, financial and dividend policies, and development
plans. Governance risk is mitigated by the fact that six out of
11 members on TransContainer's new board of directors are independent.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Surface Transportation
and Logistics published in May 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1113382.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
TransContainer PJSC (TransContainer) is the leading intermodal container
transportation company in Russia. As of 31 December 2019,
the company operated a fleet of 30,676 flatcars and 83,684
International Standards Organization (ISO) or standardised containers,
and a network of 41 rail-side container terminals in Russia,
19 rail-side terminals in Kazakhstan and a terminal in Slovakia.
In 2019, TransContainer generated revenue of RUB86.2 billion
and Moody's-adjusted EBITDA of RUB19.4 billion.
The company's principal shareholder is Delo which owns a 99.6%
stake. Delo also owns a container terminal in the Black Sea Basin,
a transportation logistics business, Ruscon Ltd, and a 30.75%
stake in Global Ports Investments Plc (GPI, Ba2 stable), Russia's
leading sea port container operator with terminals in the Baltic Basin
and the Far East.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
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same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
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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
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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
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For any affected securities or rated entities receiving direct credit
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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.
The ratings have been disclosed to the rated entity or its designated
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These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
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Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
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
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Client Service: 44 20 7772 5454
Artem Frolov
VP - Senior Credit Officer
Corporate Finance Group
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Client Service: 44 20 7772 5454
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