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 the loan / part of the loan is minimal.
OJSC Main Road is a special-purpose vehicle to implement the building and operation project of the toll road "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 concessionary agreement for 30 years was concluded for OJSC Main Road to be the concessionary and the Russian Federation (Federal Road Agency) 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.
The road has been built since 2010. In 2010, total investments in the project reached RUB 1.1 billion (including RUB 287 million allocated from Russia’s Investment Fund). In 2011, investments in the project will reach about 8 billion rubles (at a rough estimate). The amount of construction works completed meets the target. Some of the loans are already repaid. The company’s current liabilities (on its bonded loan of series 4-03) amount to RUB 8 billion, coupon payments were effected in due time.
The rating score is essentially supported the actual availability of state guarantees. Under the concessionary agreement of the state and OJSC Main Road, all principal debt and interest on the bonded loans 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 will be discharged even if the project or its implementation faces contingencies including considerable deterioration of the project’s financial results.
The state participation in the project financing is also worth mentioning. A considerable amount financing the highway construction (RUB 11 billion) is contributed by the Investment fund of the Russian Federation. The total share of the public funding for the project (excluding the state guarantees) exceeds 30%. The public financing of the project can be regarded as a positive argument. The public support ensures the project will be implemented with commercial benefits, while the regulatory bodies’ supervision over the project increases investors’ security.
All expenditures related to servicing and repayment of obligations are sufficiently covered by the company’s positive monetary flows. For instance, the minimum debt-service cover ratio (the ratio of the monetary flows available for loan servicing to the respective expenditures for the servicing and repayment of the principal debt) taking into account the reserve account and the current money funds is predicted to be 1.6 in 2014, the average value during the whole project implementation period being 4.26. Therefore, the monetary 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 mitigate the debt burden brought about by major payments in discharge of the debt when 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 (except for two short-term issues acquired by the company’s shareholders at the construction stage) will be amortized on a straight line during the last 8 years of the bond circulation period. The analysis of the payment schedule shows that the accumulation of funds to repay the debt is sufficiently uniform, with no peak payments. The company’s repayment schedule is well balanced with its monetary flows and implies high stability.
The project efficiency analysis indicates the high profitability level. Internal rate of return (IRR) for the shareholders’ contributions is 27%, internal return after taxes before debt payments is about 17%. These figures are relatively high proving the appreciable efficiency and high potential of the project.
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 in pursuance of the project implementation. 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 the cost escalation risk. Also, the expense growth parameters are laid out rather conservatively. The company will ensure due control (including specific terms, events and forms) of the quality and conditions of service. Another positive signal is that the agreement provides for a compensation to the concessionary from the concession provider or the prolongation of the construction terms should the company detect geological risks, face adverse changes in the legislation, or the necessity to change the design documentation or other such essential changes not related to the concessionary’s activity. Also, the agreement provides for a flexible mechanism of changing 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. The commitment and participation of 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 and possessing a vast resource base considerably reduces technical and engineering risks. Stroygazconsulting LLC specializing in large building & construction projects in Russia also has all the necessary qualities to ensure efficient implementation of the project. OJSC Gazprombank and Leader Management Company also engaged in the project provide support in fundraising and developing the financial activity.
The risk of seeing the incomes decrease below the target, primarily due to the lower demand from the highway users, restricts the rating score essentially. As a whole, the currently developed 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 as per the concessionary agreement may also affect the demand for the opportunities provided by the toll highway.
The project is apparently going to absorb a high amount of borrowed funds. Cumulative funds required for the highway construction (investments including capex, financial expenses etc.) amount to RUB 32.4 billion. Borrowed funds obtained as six bonded loans (including two short-term and one long-term issue of bonds acquired by the shareholders) will eventually account for more than 60% of financing for the project. The amount of debt will reach its highest point in late 2012 as the principal obligations will amount to RUB 21.2 billion. Overall, the company will pay about RUB 42 billion in discharge of the debt. The company’s financial stability ratio (equity to total assets ratio) will be within the range of 35-45% till 2028 provided that the company meets its financial targets. With the borrowed funds accounting for a large share in the company’s sources of assets in terms of its balance, the company’s obligations will not be covered by its own funds. At the same time, considering the parameters of the project 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. Expected rate on the short-term bonded loan of series 4-05 acquired by the shareholders is 4% + the Central Bank of Russia’s rate. For the principal sources of funds (the three issues to be placed in the market and the long-term issue to be acquired by the shareholders), according to the issues parameters, the rate will mainly be calculated as the inflation rate plus 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. With the poor predictability of macroeconomic parameters in the long-term prospect, the cost of servicing obligations is anything but certain. Although the bond yield may be expected to be relatively high in years to come, both the yield and the debt servicing costs will eventually decrease as the inflation rate goes down and the Russia’s economy pursues the steady growth path.
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 by the Russian Federation on the one hand and OJSC Main Road, on the other hand.
The auditor of OJSC Main Road is Consulting and Audit Firm Delovaya Perspektiva LLC, primary state registration number 1027700305588, tax number 7710160379, audit license E004799 as of August 1, 2003 of the Ministry of Finance of the Russian Federation.
Consulting and Audit Firm Delovaya Perspektiva LLC has been a member of the Russian College of Auditors (a non-profit organization) since 11/12/2009, membership certificate no. 871. The company is registered in the Register of auditors and audit organizations (no. 10305003677).
This press release is based on the statement of assigning a credit quality rating to OJSC Main Road.
The rating score, 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.
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.
AK&M Rating Agency is a leading independent national rating agency engaged in rating activities since 1993.
AK&M Rating Agency is accredited by the Ministry of Finance of the Russian Federation (order no. 452 as of September 17, 2010).
AK&M Ratings are recognized by the Central Bank of Russia (for providing unsecured lending facilities – Provision 323-P), Vnesheconombank (for granting subordinated loans) and SME Bank (for its program of lending to SME businesses), RUSNANO (when selecting banks to provide business banking services to project and engineering entities implementing investment projects), the MICEX (as a prerequisite for including bonds in the Corporate Bond Index / MICEX CBI and Municipal Bond Index / MICEX MBI calculation base, for listing bonds and for providing access to the MICEX+ trading mode). Pursuant to an order of Russia's Government AK&M Ratings count for approving the capitalization increase procedure for banks. Besides, AK&M Rating Agency is recognized by AHML and accredited by SRO National Securities Market Association.
CJSC Analysis, Consulting and Marketing Rating Agency
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Press release by: A.G. Chumachenko
Phone no. (495) 916-70-30, fax no.: (499) 132-69-18.