Press Releases / 20.01.2014
Press Release as of 20.01.2014
Main Road OJSC
AK&M Rating Agency affirmed the national scale credit rating assigned to OJSC Main Road at 'A', tier 1. The outlook is positive.
The 'A' rating indicates that OJSC Main Road is qualified as a highly reliable borrower. Risk of a delay in meeting liabilities is relatively low, restructuring risk for a loan / part of a loan is minimal.
OJSC Main Road is a special-purpose vehicle established solely for implementing the building and operation project of the toll highway "New junction of the Moscow Automobile Ring Road (MKAD) and the M-1 'Belarus' Moscow – Minsk federal highway" (a connecting highway between the MKAD near the Molodogvardeyskaya street interchange, and the M-1 federal highway). OJSC Main Road is an SPV company established by a consortium of companies ALPINE BAU, BRISA-Auto-estradas de Portugal, FCC, LEADER Management Company, Stroygazconsulting LLC, and Gazprombank OJSC. In pursuance of this public-private partnership project, a 30-year concessionary agreement was concluded specifying OJSC Main Road as the concessionary and the Russian Federation (Federal Road Agency) as the concession provider (hereinafter referred to as the concessionary agreement). Total cost of the highway construction (net capex) incl. VAT is RUB 25.5 billion. The highway is constructed and put into operation, fees have been collected from motor vehicles since January 1, 2014.
We regard the state guarantees for the project as provided for by the concessionary agreement, the Government's commitment to the project financing, commencement of commercial operation, high earning power of the project, sufficient positive cash flows to cover the debt service and repayment obligations, and low risks incidental to the highway operation as the key positive rating drivers for OJSC Main Road.
The availability of state guarantees as provided for by the concessionary agreement may be considered as the mainstay for the favorable credit rating of OJSC Main Road. Under the concessionary agreement between the state and OJSC Main Road, all principal debt and interest on the bonded loans issued shall be fully repaid by the state in case the concessionary agreement is terminated (should the concessionary default on its obligations, among other reasons). The bonded loan obligations shall be discharged even if the project or its implementation faces contingencies including considerable deterioration of the project's financial metrics. To a large extent, the reliability of bonded loans is underpinned by the credit status of Russia.
We also appreciate the Government's commitment to the project financing. The Investment Fund of the Russian Federation is a large source of funding for the highway construction project (RUB 11 billion). Public investments (apart from the state guarantees) account for over 30% of the total amount of project financing. The Government's financial commitments may be regarded as a positive argument. The regulatory bodies maintain special supervision over the project implementation, thereby increasing security of investment.
Our project efficiency analysis indicates its high earning power. Internal rate of return (IRR) before taxes and debt payments is 19.08% for the nominal cash flow, 14.21% for the real cash flow. Internal rate of return (IRR) after taxes, before debt payments is 16.58% for the nominal cash flow, 11.81% for the real cash flow. These relatively high figures highlight the appreciable effectiveness and high potential of the project. The unimpressive profits and profitability levels in the short and medium-term prospect and slow generation of positive cash flows for the shareholders should however be borne in mind.
Another key positive rating driver is the successful completion of the project recently commissioned for commercial operation. Since January 1, 2014, OJSC Main Road has been deriving positive cash flows from its core business.
As evidenced by the project analysis, the Company's positive cash flows provide a comfortable coverage for any debt service and repayment expenses. In particular, the minimum debt-service cover ratio (ratio of the cash flows available for debt servicing purposes to respective debt service / principal repayment expenses) factoring in the reserve account and the funds currently available is projected at 2.24 in 2015, the average value across the project implementation period being 4.91. Therefore, the cash flows predicted within the project's financial model are enough to cover the debt service and repayment obligations. The levels of project-specific liability coverage projected over the period until 2017 are not high, which, to a certain degree, should be treated as a risk factor. Another point is the relatively low projected revenues and EBITDA values (compared with payables) in the first years of the project existence.
The Company's projected obligation settlement profile indicates absence of essential debt load peaks. To ease the burden of major payments while implementing the project, the Company uses a reserve debt service account placing free cash funds there in advance to repay the debt liabilities and interest on them. The bonds issued (except for two short-term issues acquired by the company's shareholders at the construction stage) will be amortized on a straight line basis during the last 8 years preceding their maturity. The payment schedule analysis has revealed a sufficiently uniform accumulation of funds to repay the debt, without peak loads. The Company's repayment schedule is well balanced against its cash flows and implies high stability.
The high rating is also supported by the low risks immediately related to the construction and operation of the highway following from the terms of the concessionary agreement and the risk management policy pursuant to the project. The Company has a clear-cut breakdown of the timeframe, events and forms of its control over the quality and terms of operation. We appreciate the sufficiently high insurance coverage against the principal project-specific risks as a strong argument reducing the risk of financial loss and other losses during the highway operation and contributing to the Company's rating. Besides, the Company benefits from additional risk coverage by banking guarantees valid for the highway operation stage. The agreement entitles the concessionary to receive compensation from the concession provider should the Company be exposed to adverse legal changes, forced to change the design documentation, or face geological risks, or other such essential changes not related to the concessionary's activity – a positive argument we believe to be critically important for the concessionary in delivering the project and performing the loan obligations. Also, the agreement assumes a flexible adjustment procedure for the terms and conditions of the highway construction and operation.
At the same time, the risk of underperformance in the way of projected revenues, high share of borrowed capital in the project financing, and high uncertainty as to the bonded loan servicing cost are working against the Company's rating.
The risk of seeing revenues drop below the target, primarily due to a lower demand from the highway users, is exerting pressure on the rating. The highway is assumed to reach optimum traffic capacity in 2031. As a whole, the currently available traffic volume and traffic growth rate forecasts seem to be realistic. However, with no comparable projects to be taken as reference, forecasting traffic on toll highways in Russia is somewhat complicated (the highway's potential traffic capacity directly depends on that of the MKAD, among other things), which generates high uncertainty in the Company's incomes as far as traffic is concerned. The fairly high tariff rates proposed under the concessionary agreement may also affect the demand for the toll highway.
The project is apparently going to absorb a high amount of borrowed funds. Total investment in the highway construction project (including capex, financial outlays, etc.) amounts to RUB 32.4 billion. Borrowed capital mobilized through six bonded loans (including two short-term bonded loans, one long-term bonded loan) accounts for more than 60% of the project financing. The amount of debt will reach its peak in the first half of 2014 as the principal obligations will reach RUB 21.06 billion. Overall, OJSC Main Road will pay about RUB 40 billion in discharge of the debt. Provided that the Company meets its financial targets, its financial independence ratio (equity to total assets ratio) will stay within the 0.35-0.48 range till 2028. Given that the borrowed funds will account for a large part of the Company's balance sheet assets, obligations of OJSC Main Road will not be covered by its own funds. At the same time, considering the project parameters and terms of financing, this ratio may be regarded as acceptable even for conservative investors, and the high percentage of borrowed capital in the Company's assets as justified.
Another essential risk factor is the high uncertainty as to the bonded loan servicing cost. For the principal funding sources (three issues placed in the market, one long-term issue bought out by the shareholders), the interest rate is mainly calculated as the inflation rate plus half of Russia's GDP growth rate in the year preceding the coupon yield payment year. Therefore, actual interest rates on the securities issued directly depend on Russia's inflation rate and GDP over a long forecasting period. The poor predictability of the long-term macroeconomic environment implies high uncertainty of the debt servicing cost for the Company. Although the bond yield may be expected to be relatively high in years to come, both the yield and debt servicing cost will eventually decrease as the inflation rate goes down and the Russia's economy sees a steady growth. It will be noted that the loan servicing cost uncertainty is offset by the indexation of tariffs based on the previous year's inflation rate.
OJSC Main Road is a special purpose vehicle established 11/13/2007 by a consortium of investors including ALPINE BAU (Austria), BRISA-Auto-estradas de Portugal (Portugal), FCC (Spain), LEADER Management Company, Stroygazconsulting LLC, Gazprombank OJSC. On August 5, 2009, a concessionary agreement for the financing, construction and toll operation of the "New junction of the Moscow Automobile Ring Road (MKAD) and the M-1 'Belarus' Moscow – Minsk federal highway" was concluded between the Russian Federation, on the one hand, and OJSC Main Road, on the other hand.
To date, OJSC Main Road has placed three bond issues. Bonded loan 4-03-12755-A (the total nominal amount being RUB 8 billion) was placed 11/22/2010, final maturity date being 10/30/2028; bonded loan 4-06-12755-A (the nominal amount being RUB 8.17 billion) was placed 12/28/2012 and will mature on 12/8/2028; bonded loan 4-07-12755-A was placed 11/20/2012, its nominal amount is RUB 1.4 billion, maturity date is 10/30/2029.
In 2013, AK&M Rating Agency affirmed the 'A' credit rating assigned to bonded loan 4-07-12755-A, with a positive outlook; affirmed the 'A' credit rating assigned to bonded loan 4-03-12755-A (the latest outlook being positive); in 2014, the Agency affirmed the 'A+' credit rating (stable outlook) assigned to bonded loan 4-06-12755-A.
This press release is based on the statement of assigning a credit rating to OJSC Main Road.
The credit rating, along with any information and conclusions provided in this press release, only conveys our opinion on the Company's reliability and shall not be considered as advice on the purchase and sale of securities or the provision of loan facilities to the Company.
CJSC AK&M Rating Agency will not incur any responsibility for any interpretations, inferences and consequences related to the application of results of the rating estimation procedure by any third parties.
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