Moody's assigns (P)Baa1 rating RZD's notes
MOSCOW. March 14 (Interfax) - On Monday, Moody's Investors Service assigned a provisional (P)Baa1 rating to the proposed long-term GBP-denominated loan participation notes ("notes") to be issued by RZD Capital Limited ("RZD Capital") for the sole purpose of financing a loan to JSC Russian Railways ("Russian Railways"). The outlook is stable.
The agency said in a statement: "The (P)Baa1 rating assigned to the notes is equivalent to the senior unsecured issuer rating of Russian Railways. This reflects that RZD Capital is issuing the notes for the sole purpose of financing a loan to Russian Railways and therefore the noteholders are relying solely on the latter's creditworthiness to service and repay the debt. Russian Railways' obligations under the loan are assumed to rank pari passu with all its other unsecured and unsubordinated financial indebtedness (apart from any obligations mandatorily preferred by law). Russian Railways will use the proceeds of the respective loan in the ordinary course of its business.
"Moody's issues provisional ratings in advance of the final sale of securities and these ratings reflect Moody's preliminary credit opinion regarding the transaction only. Upon a conclusive review of the final documentation, Moody's will endeavour to assign a definitive rating to the notes. A definitive rating may differ from a provisional rating.
"Moody's regards Russian Railways as a government-related issuer (GRI). Thus, in accordance with the rating agency's GRI rating methodology, the ratings of Russian Railways and of the proposed notes incorporate a two-notch uplift from the company's stand-alone credit quality measured by a Baseline Credit Assessment (BCA) of 10 (on a scale of 1 to 21 and equivalent to Baa3). The uplift to the BCA is driven by the credit quality of the Russian government, as Russian Railway's sole shareholder, and Moody's assessment of a high probability of state support in the event of financial distress, as well as high default dependence between the company and the government.
"Based on Russian Railways' H1 2010 results and Moody's current expectations of the company's future performance, factoring in support from the government, the agency believes that the company's credit metrics are likely to remain in line with the previously given rating guidance. In particular, Russian Railways' stable outlook incorporates Moody's expectation that the government will continue to support the company and the latter will manage its debt/EBITDA and EBITA/Interest ratios, incorporating Moody's standard adjustments, below 2.5x and materially above 3.0x, respectively.
"In Moody's view, upward pressure on Russian Railways' ratings is unlikely until (i) there is a sizable and sustainable recovery in the domestic economy and freight transportation market; and (ii) the company proves its ability to cap its adjusted leverage below 2.0x on a sustainable basis, while fully comforting its debt profile and supporting its strong liquidity in line with its plan.
"Moody's would consider downgrading the ratings if Russian Railways' stand-alone credit quality were to materially deteriorate, driven by a reduction in government support and/or by a significant weakening of the rail transportation market. Such a deterioration would result in: (i) a reduction in the company's cash flow generation ability; (ii) leverage exceeding 2.5x on a sustainable basis; and (iii) interest coverage falling below 3.0x. A material weakening of the company's liquidity position could also exert a downward pressure on the ratings. In addition, a downgrade of the company's ratings could result if Moody's were to (i) downgrade the Russian sovereign rating; or (ii) review downwards its assessment of the probability of the government providing extraordinary support for the company in the event of a financial distress. The last rating action on Russian Railways was implemented on 22 March 2010, when the rating agency assigned a (P)Baa1 to the company's debut eurobond issue."