28 Sep 2010 16:07

Fitch assigns Freight One 'BBB-' rating; outlook stable

MOSCOW. Sept 28 (Interfax) - Fitch Ratings has assigned Russia-based OJSC Freight One (Freight One) Long-term foreign and local currency Issuer Default Ratings (IDR) of 'BBB-', and a National Long-term rating of 'AA+(rus)'. The Outlook is Stable, the agency said in a press release.

Fitch has also assigned Freight One Short-term foreign and local currency IDRs of 'F3'.

The ratings are primarily driven by the existing legal, and strong operational and strategic relationship between Freight One and its 100% shareholder JSC Russian Railways (RZD; 'BBB'/Stable). Although there are no direct guarantees by RZD, Freight One represents over 10% of RZD's consolidated revenues and is therefore a Principal Subsidiary (as defined in RZD's Loan Participation Notes). Freight One's default (among other events) could be an Event of Default for RZD. This factor, together with Fitch's assessment of the operational and strategic links between Freight One and its parent enables the Long-term IDRs of Freight One to be notched down by one notch from the Long-term IDRs of RZD.

Fitch views Freight One's standalone business and financial profile commensurate with a Long-term IDR of 'BB+'.

"The standalone profile is primarily supported by Freight One's leading position in Russia and the CIS in terms of its fleet size and volumes of transportation, by its strong ability to execute customer demand, and by its diversified fleet and customer base," says Josef Pospisil, Director in Fitch's EMEA Corporate team.

Freight One's longer average distance travelled and higher common load result in strong productivity compared to peers. The company also has a strong financial profile with healthy margins and low expected unadjusted leverage (gross debt to EBITDA below 1.0x), despite sizeable capex plans to renew its ageing fleet.

These strengths are partially offset by its exposure to cyclical commodity industries (oil and gas, metals and mining, construction, etc) and above-average exposure to lower tariff cargoes (coal, oil). Freight One also has a higher empty run ratio and older fleet (with an average age of 20.3 years) compared to privately-owned CIS peers (such as Kazakhstan's Eastcomtrans LLC's ('B-'/Stable) at 4.1 years).

The company's corporate structure is evolving (with possible partial divestment by RZD over the next year), and its strategy assumes geographical growth and business expansion into wagon services. However, the M&A risk is viewed as limited. The dividend policy is expected to remain lenient, with payout at 10% of net profit.

The company's debt is secured (with pledges over around 5% of the wagons), and includes finance and operational leases, as is common in the industry. The operating leases (currently with RZD) are annual (and therefore short-term) contracts; however, Fitch uses a 5x multiple to capitalise the related cost because there is an expectation for part of the contract to be maintained over the long term. Total lease-adjusted debt to EBITDAR is expected to remain below 2.0x.

Freight One's liquidity is adequate, consisting of around RUB1.2bn cash and deposits (as of 1 September 2010) and RUB2.5bn of unused committed credit lines (maturing in 2012) and helped by an amortising debt profile (average annual maturity is RUB1bn). Foreign exchange risk on its USD130m (RUB3.9bn) loan from the European Bank for Reconstruction and Development is mitigated due to offsetting US dollar and Swiss franc-denominated revenues, but rising interest rates would be a risk as its financing is based on floating rates.