Press Releases / 04.02.2013
Press Release as of 04.02.2013
Main Road OJSC
AK&M Rating Agency confirmed the ‘A’ credit rating (positive outlook) assigned to OJSC Main Road as per the national scale.
The ‘A’ rating indicates that OJSC Main Road (tax number: 7726581132) 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 MKAD (Moscow Automobile Ring Road) and the federal highway M-1 'Belarus' Moscow – Minsk” (a connecting highway between MKAD near the road interchange with Molodogvardeyskaya street, and the federal highway M-1). 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 (capital costs) incl. VAT is RUB 25.5 billion. The project is financed with borrowed funds (bonds) and funds allocated from the RF Investment Fund.
Construction of the road has been in progress since 2010. As if the end of 2012, total investments in the project exceeded RUB 15 billion. The amount of construction works completed meets the target. Some of the previous borrowings have been already repaid. The Company’s current liabilities on its bonded loans in circulation amount to almost RUB 17.6 billion, the 2012 coupon payments were effected in due time. Completion of the construction project is expected in late 2013, commercial operation will start in January 2014.
The rating score of OJSC Main Road is essentially supported by the availability of direct or indirect state guarantees for the project, the government’s commitment to the project financing, the good balance of project-specific cash flows, the high earning power of the project, the low risks incidental to the construction and operation of the highway, the high proficiency of the project participants and the concessionary’s right to receive compensation from the concession provider, or to have the construction deadline extended, negotiated into the concessionary agreement.
One of the key arguments for the high rating is the actual availability of state guarantees. 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 results.
The government’s commitment to the project financing is also worth mentioning. 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 public support ensures that the project will be implemented with commercial benefits, while the regulatory bodies’ supervision increases investors’ security.
The Company’s positive cash flows provide a comfortable coverage for any expenses related to servicing and repayment of obligations. In particular, the minimum debt-service cover ratio (ratio of the cash flows available for debt servicing to the respective debt servicing / 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 servicing and repayment obligations.
The schedule of payments on the Company’s obligations indicates absence of essential debt load peaks. To ease the debt burden brought about by major payments in discharge of the debt while implementing the project, the Company will use its reserve account for loan servicing purposes, placing free cash funds there in advance to repay the debt liabilities and interest on them. The bonds issued will be amortized on a straight line basis during the last 8 years preceding their maturity. The payment schedule indicates 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 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 figures are relatively high proving the appreciable efficiency and high potential of the project. Also of note are the fairly low profits and profitability metrics in the short and medium-term prospect levels in and the late period of forming of positive monetary flows for the shareholders.
The high rating score 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 contracts for construction works concluded with the general contractor specify fixed prices, which sends a positive signal for the risk estimation in the way of eventual cost escalation risk. Also, the Company’s growth estimates tend to be conservative. The Company will ensure due control, including specific terms, events and forms, of the quality and terms of service. Another positive signal is that the agreement enables the concessionary to receive compensation from the concession provider, or to have the construction deadline extended, should the Company be exposed to adverse changes in the legislation or forced to change the design documentation, or detect geological risks, or face other such essential changes not related to the concessionary’s activity. Also, the agreement assumes a flexible adjustment procedure for the terms and conditions of the road construction and operation.
The high rating score is supported by the high expertise of participants of the toll road construction consortium. At its early stage, the project benefited from cooperation with the foreign specialists ALPINE BAU, BRISA-Auto-estradas de Portugal and FCC possessing considerable experience in the construction and operation of toll roads in Europe alongside with a vast resource base, which brought down technical and engineering risks. Stroygazconsulting LLC specializing in large building & construction projects in Russia also has all the necessary qualities to ensure efficient completion of the project. OJSC Gazprombank and Leader Management Company also engaged in the project, contributing to fundraising.
The risk of underperformance in the way of incomes, the high borrowing requirements and the high debt service cost uncertainty with respect to the Company’s bonded loans are working against the rating score of OJSC Main Road.
The risk of seeing incomes drop below the target, primarily due to the lower demand from the highway users, restricts the rating score essentially. 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, 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. Aggregate funds required for the highway construction (investments including capex, financial outlays etc.) amount to RUB 32.4 billion. Borrowed funds obtained through bonded loans will eventually account for more than 60% of the project financing. The amount of debt will reach its highest point in late 2013 and early 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 35-45% 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 the terms of financing, this ratio may be regarded as acceptable even for conservative investors, and the high percentage of borrowed funds in the Company’s assets as justified.
Another risk factor is the high uncertainty as to how much servicing the bonded loans may cost. For the principal funding sources (three issues placed in the market, one long-term issue bought out by the shareholders), the interest rate will mainly be calculated as the inflation rate plus half of Russia’s GDP growth rate in the year preceding to the coupon yield payment year. Therefore, the actual rates on the securities issued directly depend on the inflation rate and Russia’s gross domestic product 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.
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, OJSC Gazprombank for the construction of a new junction of MKAD (Moscow Automobile Ring Road) and the federal highway M-1. On August 5, 2009, a concessionary agreement for the financing, construction and toll operation of the “New junction of the Moscow Automobile Ring Road and the federal highway M-1 'Belarus' Moscow – Minsk” was concluded between the Russian Federation, on the one hand and OJSC Main Road, on the other hand.
OJSC Main Road has placed three bond issues being in circulation. 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 if RUB 1.4 billion, maturity date is 10/30/2029.
In 2012, AK&M Rating Agency rated bonded loan 4-07-12755-A ‘A’, with a positive outlook; in 2013, the Agency assigned the ‘A’ credit rating (positive outlook) to bonded loan 4-03-12755-A and the ‘A’ credit rating (stable outlook) 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.
CJSC AK&M Rating Agency is a leading independent national rating agency engaged in rating activities since 1993.
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