ACRA affirms A-(RU) to Soyuzdorstroy JSC (AVTOBAN GC), outlook Stable, and affirms A-(RU) to bonds issued by AVTOBAN-Finance JSC

The credit rating of Soyuzdorstroy JSC (hereinafter, AVTOBAN GC, or the Company) is based on the Company's strong business profile and stable market positions driven by the increased engagement of the Company in a number of large-scale private-public partnership projects, including concessions, as well as by its capabilities to successfully bid in road construction tenders. Thanks to its well-diversified business, AVTOBAN GC’s business model is subject to moderate risks, which enables it building important federal and regional roads commissioned by government agencies. The Company's conservative financial policy ensures low leverage and good liquidity.

The rating is limited by the Company’s medium size, medium debt service indicators, and low cash flow. In addition, the infrastructure construction industry is exposed to high risks, which also limits the Company’s credit rating. In addition, ACRA notes that road construction is the least risky segment in the industry.

AVTOBAN GC is one of three largest road construction companies in Russia, with the revenue of RUB 70.2 bln and a market share of over 9% in 2019. The Company is the leader in PPP projects in transportation infrastructure (RUB 190 bln). In 2018–2019, the Company commissioned 263 km of motor roads, and the total amount of committed contracts for 2021–2024 exceeds RUB 400 bln. About 98% of the Company’s revenues come from government contracts. A.V. Andreyev owns 100% of the Company’s shares.

Key rating assessment factors

Strong business profile. AVTOBAN GC focuses on and has extensive expertise in the construction of road facilities. This type of infrastructure construction activities (paved roads), in ACRA’s opinion, has a low complexity profile. Therefore, the "complexity and construction experience" sub-factor has received the maximal score. The Company has accumulated a great expertise and its contract portfolio covers 100% of its output capacity until 2024, which is the reason for the "high" assessment score for the "contract base quality" sub-factor. At the same time, ACRA points to the presence of a large customer concentration risk (The State Company “Russian Highways” accounted for 82% of 2019 revenues). Due to subcontracting (29.18% of 2019 revenues), the Company loses some of its revenues. ACRA expects that the share of subcontracting in the Company’s revenues will remain substantial regardless the increase in the contract base. The Company has sufficient capacity to build 200 km of paved roads a year. AVTOBAN GC has a wide geographic reach covering 15 constituent entities in four federal districts of the Russian Federation, so that the Company participates effectively in the construction of both federal and regional motorways and secures roadbed maintenance contracts.

Medium level of corporate governance. The Company has a long-term development program until 2024, which implies an increase in the market share and contract base and maintaining a consistently high profitability. To achieve the strategic goals, the Company intends to improve its competencies in design, as well as in the construction and operation of infrastructure facilities. The Company is active in PPP projects, including concessions. All financial risk management targets are determined annually by the board of directors of DSK AVTOBAN JSC (a member of AVTOBAN GC) and the ultimate beneficiary. The Company's exposure to currency and interest rate risks is low. AVTOBAN GC includes about 30 entities, which is due to the operational needs and the specifics of business, in particular, concession projects. At the same time, ACRA notes the absence of intra-group cash flows between concession companies and other companies of AVTOBAN GC. The Company discloses its 6- and 12-month consolidated IFRS financial statements audited by KPMG, quarterly reports, and significant events.

Low leverage and adequate coverage. The Company has significantly changed its business model over the last few years, which is due to the increased engagement of AVTOBAN GC in concession agreements. These agreements involve participation of private investors and large state-run banks, while the respective credit financing has a long-term profile.

The Company is currently a party to three concession agreements.

The debt raised under concession agreements has no recourse to AVTOBAN GC; the principal shareholder is a surety under the junior debt. Therefore, ACRA regards the concession-related debt of concessionary companies that are part of AVTOBAN GC as segregated, as concession loans are required by law to be fully repaid in case of any changes in the concession terms and conditions regardless of the concessioner’s fault. ACRA notes that the Company’s leverage (total debt, including the concession-related debt, to FFO before net interest payments ratio) was 7.4x as of December 31, 2019.

In the following text, ACRA refers to adjusted debt figures that exclude the debt under concession agreements.

According to ACRA's estimates, the Company’s debt and leverage are unlikely to change significantly in the next two to three years. The Company’s total debt declined to RUB 15.8 bln in 2019 (vs RUB 16.1 bln in 2018) and it will remain at the current level until late 2020. In 2019, the ratio of total debt to FFO before net interest payments amounted to 2.0x, and in 2020, it is expected to be about 1.6x because of the growth in the operating cash flow. ACRA expects that by late 2021, the ratio will go down to about 1.5x. The Company’s debt profile includes bank loans and internal bond issues in almost equal shares. Most debt repayments are to be made by the Company in 2021–2022. Being denominated in the Russian rubles, the Company’s debt has no FX exposure.

The interest payment coverage ratio (FFO before net interest payments to interest payments), without payments under concession agreements, is expected to be about 5.9x in 2020–2022.

Medium business size and high profitability. According to ACRA's estimates, the average FFO before net interest payments and taxes will be about RUB 14 bln in the period from 2020 to 2022. This means a stabilization of the ratio compared to its volatile growth in the previous three years, which was caused by an increase in the contract base for PPP projects. The Company's FFO margin before interest and taxes was as high as 15.4% at the end of 2019. ACRA expects this ratio to stabilize at this level until 2022.

High liquidity amid low cash flow. ACRA assesses the Company's liquidity as high, even taking into account the limited use of cash under concession projects. The liquidity is supported mostly by undrawn credit facilities. The qualitative liquidity assessment is high: the largest lenders of the Company include Promsvyazbank PJSC (AA(RU), Stable), Sberbank (AAA(RU), Stable), and «Bank Otkritie Financial Corporation» (Public Joint-Stock Company) (AA-(RU), Stable). The Company uses public debt instruments as well.

The Company’s free cash flow was negative in 2017–2019, which was caused by the business growth and the need to invest heavily in the working capital. ACRA expects that FCF will remain negative in 2020, but in 2021, it will become positive.

Key assumptions

  • Revenues and prime costs to grow in 2020–2022, and the investment program to be implemented in accordance with the Company's business plan;
  • Annual dividend payments not to exceed RUB 1 bln;
  • Company’s leverage to stay at the current level.

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:

  • FFO before net interest payments and taxes rising above RUB 30 bln and the corporate governance quality score going up to high;
  • The averaged debt service indicator (the FFO before net interest payments to interest payments ratio) rising above 5x, and the averaged FCF margin reaching 5%.

A negative rating action may be prompted by:

  • FFO before net interest payments and taxes declining below RUB 5 bln;
  • The averaged debt service indicator (the FFO before net interest payments to interest payments ratio) decreasing below 2.5х;
  • A significant deterioration of access to external sources of liquidity.

Rating components

SCA: a-.

Adjustments: none.

Issue ratings

Bond loan, Certified unregistered commercial paper, KO-01 series issued by AVTOBAN-Finance JSC (RU000A100UQ8), maturity date: September 16, 2022, issue volume: RUB 5 bln — А-(RU).

Bond loan, Certified exchange-traded interest bearing unregistered bond issued by AVTOBAN-Finance JSC, BO-P02 series (RU000A100733), maturity date: March 19, 2024, issue volume: RUB 3 bln — А-(RU).

Rationale. The above bond issues by AVTOBAN-Finance JSC, a member company of AVTOBAN GC, represent senior unsecured debt of AVTOBAN-Finance JSC according to ACRA methodology, secured by call options and suretyships of the operating companies of AVTOBAN GC, including DSK AVTOBAN JSC, Khanty-Mansiyskdorstroy OJSC, Soyuzdorstroy JSC. The credit rating was assigned based on the issue documentation, according to which the sureties are jointly liable to the bondholders for the issuer’s failure to perform or improper performance of its obligations.

Due to the absence of either structural or contractual subordination of the issues, ACRA regards it as pari passu with other existing and future unsecured and unsubordinated obligations of the Company.

In accordance with the ACRA methodology and in view of the Company’s high creditworthiness and low leverage, the credit rating of the issues is on par with that of the Company, i.e. A-(RU).

Regulatory disclosure

The credit ratings have been assigned under the national scale for the Russian Federation and are 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 Analytical Credit Rating Agency within the Scope of Its Rating Activities. The Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments Under the National Scale of the Russian Federation was also applied to assign the credit ratings to the above bond issues.

The credit rating assigned to Soyuzdorstroy JSC and the credit ratings assigned to the bonds issued by AVTOBAN-Finance JSC (ISIN RU000A100733, RU000A100UQ8) were first published by ACRA on December 29, 2017 and December 20, 2019, respectively. The credit rating and its outlook and the credit ratings of the bonds issued by AVTOBAN-Finance JSC (ISIN RU000A100733, RU000A100UQ8) are expected to be revised within one year following the publication date of this press release.

The credit ratings were assigned based on the data provided by Soyuzdorstroy JSC, information from publicly available sources, as well as ACRA’s own databases. The credit ratings were assigned on the basis of the consolidated IFRS financial statements of Soyuzdorstroy JSC. The credit ratings are solicited, and Soyuzdorstroy JSC participated in their assignment.

No material discrepancies between the provided data and the data officially disclosed by Soyuzdorstroy JSC in its financial statements have been discovered.

ACRA provided no additional services to Soyuzdorstroy JSC. ACRA provided additional services to AVTOBAN-Finance JSC. No conflicts of interest were discovered in the course of credit rating assignment.

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