Training on Forecasting, April 7–8

ACRA affirms A(RU) to RKS-Holding LLC, outlook Stable

The credit rating of RKS-Holding LLC (hereinafter, the Company) is based on the Company’s very low industry risk, strong market position, medium business profile assessment, acceptable profitability, strong liquidity, and strong cash flow. The rating is limited by the Company’s medium business size as well as regulatory risks.  

The Company is one of the largest utilities operators in Russia, providing water supply and water sewage services, its key business, as well as heating and electric power supplies. The Company provides its services in nine regions of Russia. The Company consists of companies operating on the basis of lease and concession agreements and other operating assets supporting its activities. The Company is owned by PJSC T Plus.

Key rating assessment factors

Acceptable profitability and low price risks. The Company provides services in the segment of natural monopolies. There is almost no competition in the utilities sector, prices for services are relatively predictable, and demand is inelastic and responds very little to price changes. ACRA believes that the Company’s position can be strengthened by increasing the share of regions in the revenue structure where concession agreements are concluded between local administrations and the Company. ACRA believes this could reduce the risk of needed to replace operators of water supply and water sewage infrastructure. These regions currently account for less than 50% of the Company’s revenue. Sales risks are associated with consumer delinquency (non-payment). According to ACRA, the Company operates in regions with moderate levels of socio-economic development. The Company’s return on FFO before interest and taxes was 19% in 2017-2018. ACRA expects the average annual value of this figure to drop to 18% in 2019-2022 due to the Company’s expense growth outpacing its revenues, whose amount depends on tariffs subject to state regulation. According to results for 2018, the Company’s revenue increased by 6.5% y-o-y and amounted to RUB 24.8 bln, which was due to an increase in tariffs for water supply and water sewage, as well as an increase in revenues from non-core sources of income. ACRA expects the Company’s revenues for 2019 to grow by 1% y-o-y to RUB 25 bln due to annual tariff indexation (the forecasts exclude the influence of a one-time factor). The Company has almost no problems with overdue receivables: its annual volume is about 2% of revenue, which is included in the tariff.

Moderate investment commitments. In 2018, the Company’s investments to maintain existing production assets increased by 19% y-o-y and amounted to RUB 2.4 bln excluding VAT (RUB 2 bln excluding VAT in 2017). Current capital investments are aimed at reconstructing, modernizing, and technically re-equipping water supply and water sewage systems managed by the Company in order to improve their reliability and efficiency. The Company’s investment to revenue ratio equaled 10% for 2018, comparable to 2017. ACRA expects the Company’s investment volume to grow in 2019-2022, averaging RUB 2.5 bln annually (10% of revenue). ACRA currently assesses the depreciation of the Company’s fixed assets as moderate.

Adequate free cash flow. According to results for 2018, the Company’s free cash flow (FCF) increased by 19% compared to 2017 (RUB 1.6 bln compared to RUB 1.3 bln). ACRA expects the average annual FCF to decrease in 2019-2022 due to increased investment activity, amounting to about RUB 1.1 bln.

Low leverage and strong liquidity. As of January 1, 2020, the Company’s debt portfolio amounted to RUB 4 bln, or 1.4x relative to FFO before net interest payments. Most of the Company’s debt is due in 2022. The debt consists of bank loans, which are mainly long-term and denominated in rubles. Most of the debt portfolio (54%) is held by a single lender. ACRA expects the Company’s total debt to increase in 2019-2022, averaging RUB 4.5 bln annually, with total debt to FFO before net interest payments decreasing to an average annual value of 1.2x.

ACRA assesses the Company’s liquidity as strong. As of January 1, 2020, the Company's accounts had accumulated RUB 0.7 bln. The Company also has free credit limits totaling RUB 6 bln.

Key assumptions

  • Maintaining average tariff indexation at 4% in 2019-2022;
  • Maintaining the ratio of receivable impairment reserves to revenues within 3%;
  • Implementing the capital development program according to the established deadlines and volumes (about 10% of revenues);
  • Maintaining current leverage (total debt to FFO before net interest payments less than 2x);
  • Maintaining access to outside sources of liquidity.

Potential outlook or rating change factors

The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.

A positive rating action may be prompted by:

  • Maintaining returns on FFO before interest payments and taxes above 15% with simultaneous growth in returns on FCF above 5%;
  • Significant increase in the scale of business;
  • Increase in FFO before net interest payments to interest payments above 10x and a reduction in total debt below 1.0x of FFO;
  • Increased share of regions where concession agreements concluded between local administrations and the Company exceed 70% of total revenue.

A negative rating action may be prompted by:

  • Increase in regulatory risks;
  • Increase in the ratio of receivable impairment reserves to revenues above 3%;
  • Increased leverage (increase in total debt above 2.0x of FFO) and a reduction in the ratio of FFO before net interest payments to interest payments below 5.0x with simultaneous deterioration in debt structure;
  • Decrease in return on FFO before interest payments and taxes below 5%;
  • Deterioration in liquidity.

Rating components

SCA: а.

Adjustments: none.

Support: none.

Issue ratings

No outstanding issues have been rated.

Regulatory disclosure

The credit rating has been assigned under the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Non-Financial Corporations under the National Scale for the Russian Federation and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities.

The credit rating of RKS-Holding LLC was published by ACRA for the first time on March 27, 2018. The credit rating and its outlook are expected to be revised within one year following the publication date of this press release.

The credit rating is based on data provided by RKS-Holding LLC, information from publicly available sources, as well as ACRA’s own databases. The credit rating is solicited, and RKS-Holding LLC participated in its assignment.

No material discrepancies between the provided data and data officially disclosed by RKS-Holding LLC in its financial statements have been discovered.

ACRA provided no additional services to RKS-Holding LLC. No conflicts of interest were discovered in the course of credit rating assignment.

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