29 Jul 2009 14:21

S&P rates three Russian Railways bond issues 'BBB/ruAAA'

PARIS. July 28 (Interfax) - Standard & Poor's Ratings Services has assigned its 'BBB' long-term senior unsecured debt rating and 'ruAAA' Russia national scale rating to three new bonds issued by Russian Railways (RZD) (BBB/Negative/--; Russia national scale rating 'ruAAA'):

--A Russian ruble (RUR) 15 billion (about $480 million) senior unsecured bond "Series 17", due 2018;

--A RUR15 billion (about $480 million) senior unsecured bond "Series 18", due 2019; and

--A RUR10 billion (about $320 million) senior unsecured bond "Series 19", due 2024.

The three new issues are floating-rate bonds (initially fixed at 14.05%, 14.25%, and 13.5% per year, respectively), which are linked to a seven-day direct repo rate (to be determined by the Central Bank of Russia), the ratings agency said in a statement.

Bondholders have the option to redeem the bonds in four, five, and two years, respectively, after the date of placement. S&P understands from Russian Railways that it will use the proceeds to finance rail infrastructure projects.

The ratings on the bonds have been equalized with the long-term corporate credit rating on RZD.

S&P understands from RZD that all previous domestic bond issues publicly placed since November 2008 (except the one issued in March 2009), totaling RUR105 billion, contain a put option that allows bondholders to right to redeem the bond before maturity. In the agency's view, this weakens the group's liquidity and adds refinancing risk.

RZD is 100% owned by the Russian Federation (foreign currency BBB/Negative/A-3; local currency BBB+/Negative/A-2; Russia national scale 'ruAAA'). Standard & Poor's analyzes RZD using its criteria for government-related entities. The ratings on RZD reflect S&P's opinion that the likelihood of timely and sufficient extraordinary government support is "extremely high". S&P considers RZD's role to be "critical" for the government and the link between RZD and the government to be "very strong". S&P assesses RZD's stand-alone credit profile at 'BB+'.

The ratings on RZD also reflect the company's monopoly status as national railroad infrastructure owner and operator, the strong competitiveness of railroads in Russia, and the company's domination of the national railroad market.

These strengths are offset by RZD's exposure to the Russian commodity-based and export-oriented economy, lower profitability and cash flow generation as a result of decreasing freight traffic, and high funding requirements due to negative free operating cash flow and refinancing needs.

Furthermore, RZD has an aggressive financial profile, with weak stand-alone liquidity, and it faces restructuring and competition risk stemming from ongoing railway reform in Russia.