Press Releases / 11.08.2016
Press Release as of 11.08.2016
CJSC Wastes Management
AK&M Rating Agency has affirmed the national scale credit rating of bonded loan of series 4-02-76600-H issued by CJSC Upravlenie otkhodami at 'A+'. The outlook is stable.
The rating 'A+' means that bond issue of series 4-02-76600-H (series 02) of CJSC Upravlenie otkhodami qualifies as a highly creditworthy debt instrument. The risk of a failure to meet obligations in time is insignificant. The rating assignment is based on the Credit Rating Methodology for Specialized Project Financing Entities (rev. February 16, 2015, including the amendments and additions approved by the Methodology Committee on October 12, 2015 and February 16, 2016).
Bond issue 02 is aimed at raising financial resources in the securities market to finance and implement the project of creating and subsequently operating a solid domestic waste treatment and disposal facility in the Chuvash Republic (the Chuvash project).
The project is being implemented pursuant to a 25-year concessionary agreement signed with the Chuvash Republic on July 1, 2014. This agreement determines all aspects of the relationship between the authorized regional authorities and CJSC Upravlenie otkhodami and formulates the parties' rights and obligations during the implementation of this agreement. The concessionary agreement envisages a project payback period of 7 years and the complete reimbursement of the Company's investment and operating costs including financial expenses. The waste treatment tariff calculation set forth in the agreement is adjusted for a standard profit derivative of the amount of expenses, which ensures the project profitability.
The principal issue of bonded loan 02 of CJSC Upravlenie otkhodami maturing in June 2025, with a total nominal value of RUB 1,000,000,000 was placed on December 2, 2014.
An additional issue of bonded loan 02 of CJSC Upravlenie otkhodami with a total nominal value of RUB 700,000,000 was placed on December 4, 2015. The coupon periods and the principal debt maturity of the additional issue are not different from those of the principal issue of bonded loan 02.
The positive rating drivers for bonded loan 02 include high earnings from the Chuvash project, a good balance of main financial flows and high financial viability of the Chuvash project; availability of guarantees from the government of the Chuvash Republic fixed by the concessionary agreement, a high credit rating of the bond issuer, as well as low risks incidental to the construction and operation of the Chuvash project.
The project of creation and subsequent operation of a solid domestic waste treatment and disposal facility in the Chuvash Republic promises high earnings. Total net profit for the whole project life cycle is estimated at RUB 7,068 million, net present value of the project at RUB 1,090 million.
The minimum modified internal rate of return for the project is 17.3%, implying a payback period of six years, which is fairly good for an infrastructure project.
One of the major positive rating arguments for bonded loan 02 is a comfortable balance of the cash flows generated by the project, the excess of income over expenses and the high financial stability of the project. Net cash flow accumulated during the life cycle of the project will exceed RUB 6.5 billion. The net cash flow balance of the project has been above zero since 2014 and will stay in the positive zone for the whole project life cycle, which indicates high financial viability of the project.
The good balance of financial flows and high financial stability of the Chuvash project reflects ample capabilities for unproblematic loan debt servicing. The average annual debt coverage ratio under the project is 3.97. The minimum interest coverage ratio will be firmly above 1 starting from 2018.
With this in mind, the Company's debt burden will be on a favorable trend. From an extremely high level in 2018, the debt ratio will go down to 3 in 2019, to 2.3 in 2020 and continue to decrease later.
The availability of actual guarantees from the Chuvash Republic enshrined in concessionary agreements contributes essentially to the credit rating of bonded loan 02 of CJSC Upravlenie otkhodami. The agreements provide for the complete reimbursement of investment and operating costs, including financial expenses. Under the agreements, the waste treatment and disposal tariff is based on the amount of expenses, adjusted for a standard profit derivative of the amount of expenses, which ensures the profitability of CJSC Upravlenie otkhodami's Chuvash project.
One of the key positive rating drivers for bonded loan 02 of CJSC Upravlenie otkhodami is a strong rating position of the issuer. CJSC Upravlenie otkhodami is implementing a high-earning portfolio of projects, the overall modified internal rate of return being 18.8%, with firmly positive consolidated cash flows generated by CJSC Upravlenie otkhodami starting from 2016.
The process of creating solid domestic waste treatment and disposal capacities involves simple, well-proven technologies, which minimizes construction risks. The operation of these capacities is also uncomplicated and time-proven; the operation risks can therefore be estimated as low.
At the same time, the risks of lower-than-projected incomes due to poor collectability of utility payments aggravated by the continuing economic crisis, the risks of growing cost of borrowings and a high debt burden under the Chuvash project in the forthcoming 12-month period are putting pressure on bonded loan of series 02.
Amidst a continuing economic and a social / economic downturn in Russia, the risk of lower-than-projected incomes due to poor collectability of utility payments becomes of special importance among the potential rating constraints for bonded loan of series 02; long-term forecasts of utility payment collectability trends in the Chuvash Republic have an element of uncertainty. The general financial difficulties also give rise to certain administrative risks influencing, among others, the key tariff approval and annual revision process.
Given that the Chuvash project is being directly implemented by CJSC Upravlenie otkhodami, the risks of growing coupon rates on other bonded loans of the issuer in the forthcoming 12-month period are constraining the credit rating of bonded loan of series 02.
The heavy debt burden initial stage of the project also constrains the rating of bonded loan 02. The debt load ratio (net debt / EBITDA ratio) for the Chuvash project is estimated at 8.2 in 2016, 4.8 in 2017.
This press release refers to the Statement of assignment of a credit rating to bonded loan no. 4-02-76600-H of CJSC Upravlenie otkhodami based on the Credit Rating Methodology for Specialized Project Financing Entities (rev. February 16, 2015, including the amendments and additions approved by the Methodology Committee on October 12, 2015 and February 16, 2016).
AK&M Rating Agency assigned a credit rating to bonded loan of series 4-02-76600-H of CJSC Upravlenie otkhodami for the first time on November 28, 2014. The last rating action was taken on June 23, 2015. All rating action announcements are published on the http://www.akmrating.ru website.
The rating is valid until August 2017. AK&M Rating Agency may revise the rating and/or the outlook during this period if circumstances fundamentally influencing the Company's creditworthiness are revealed.
For estimation purposes, we completely rely on the reliability of information provided by the Company. The rationale for AK&M Rating Agency's judgment on the rating may include information acquired from other sources we deem to be reliable; however, the agency does not check the input data exhaustively and disclaims all responsibility for their possible errors.
The rating, along with any information and conclusions provided in this press release, only conveys our creditworthiness opinion and shall not be construed as a recommendation to make any investment decisions.
AK&M Rating Agency shall not be held liable 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
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