ACRA affirms BBB+(RU) to Soyuzdorstroy LLC (AVTOBAN GC), changes outlook to Positive

The credit rating of Soyuzdorstroy LLC (hereinafter, AVTOBAN GC, or the Company) is based on a strong business profile and strong market positions of the Company. Furthermore, the Company has a very strong geographical diversification. The rating is limited by the Company’s medium size and medium financial profile. The Company works in the infrastructure construction industry, which also puts pressure on the rating. However, ACRA notes that road construction is the least risky segment in the industry.

The credit rating outlook on AVTOBAN GC has been changed due to the expected growth of operating cash flow as a result of implementation of concession projects of construction of Phase No. 3 and No. 4 of the Central Ring Road (TsKAD-3 and TsKAD-4).

AVTOBAN GC is the one of the largest road construction companies in Russia with its market share expected to reach 8.4% in 2018. This year, the Company will construct 164 km or motor roads, and the total amount of its backlog exceeds RUB 196.6 bln. Nearly 90% of the Company’s revenue comes from governmental contracts. The Company has a successful track record in private-public partnerships, including concession agreements.

Key rating assessment factors

Strong business profile. AVTOBAN GC focuses on the construction of paved roads and has extensive expertise in this area. The Company’s contract portfolio provides for a sufficient amount of work over the next four years. In the meantime, ACRA points to the presence of a large customer concentration risk. The share of subcontracts is significant and amounts to 37% of total contracts carried out by the Company in 2018, which is due to the Company’s entry into the concession market. However, the Company’s own capacity enables it to perform works without involving subcontractors should the need arise. The Company has an extensive geographical presence, covering the country’s most developed regions (the Moscow Region, the Khanty-Mansiysk Autonomous Okrug-Yugra and others); the Company could enter the Moscow market in the long-term.

Medium leverage and medium coverage. ACRA considers the Company’s debt under concession agreements to be separate from AVTOBAN GC. In accordance with Federal Law No. 115-FZ of July 21, 2005, on Concession Agreements, a concession loan should be fully repaid if the terms of the concession are changed due to any reason. Also, the terms of the concession do not stipulate sureties or guarantees supported by the Company’s operating assets for obligations of the concessionaire company (including ASK LLC, a unit of AVTOBAN GC). According to ACRA estimates, AVTOBAN GC’s debt will amount to RUB 13.5 bln in 2018 before dropping to RUB 7.7 bln by 2019. AVTOBAN GC’s leverage (the total debt to FFO before net interest payments ratio) will amount to 2.4x in 2016-2021, while the debt to equity ratio will total 1x. The debt repayment schedule is quite comfortable because large repayments are expected to start from 2020. The debt coverage will amount to 2.8x, ACRA estimates show.

Secure industry positions. At the end of 2017, the Company’s FFO before net interest payments and taxes amounted to RUB 3.4 bln, and by 2021, according to ACRA’s forecast, it will reach RUB 4.9 bln. The Company’s total backlog equals RUB 197 bln, which corresponds to the high assessment of this factor. The Company’s profitability to FFO before net interest payments and taxes throughout the forecast period should remain at the level average for construction companies.

Average liquidity position with average cash flow. Taking into account the significant cash balances on the accounts of AVTOBAN GC, as well as undrawn limits on credit lines, ACRA expects that the Company’s short-term liquidity ratio will amount to 1.2 in 2018-2021. The qualitative liquidity assessment is high; the Company attracts financing from major banks at the key rate plus 2.5% and has public debt placement experience in the Russian market. The Company’s cash flow will be at an average level due to the capital costs of new equipment for the construction of TsKAD-3 and TsKAD-4 as well as due to dividend payments in the amount of 20% of new profits.

Adequate level of corporate management. The Company’s strategy is conservative and stipulates the implementation of large, profitable projects. AVTOBAN GC actively develops concession and PPP projects. The Company’s financial risk management policies are determined annually by the board of directors of DSC AVTOBAN (a unit of AVTOBAN GC) and its key beneficiary. The exposure to foreign exchange and interest rate risks is low. AVTOBAN GC includes a significant number of legal entities; however, this is due to production needs and operating specifics. At the same time, there have been no intra-group cash flows between these entities. The Company issues annual reports (non-public) audited by an international audit company.

Key assumptions

  • The annual revenue growth by 8.5% from the implementation of projects;
  • Dividend payments within 20% of net profit;
  • Implementation of the RUB 2.7 bln annual investment program and no need to borrow funds.

Potential outlook or rating change factors

The Positive 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 5 bln coupled with the simultaneous decline of leverage (the total debt to FFO before net interest payments ratio) below 2х;
  • Average FFO margin before interest payments and taxes growing above 12% coupled with the simultaneous improvement of the average debt service indicator (the FFO before net interest payments to interest payments ratio) above 5х;
  • The growth of the average debt service indicator (the FFO before net interest payments to interest payments ratio) above 8x.

A negative rating action may be prompted by:

  • FFO before net interest and taxes falling below RUB 500 mln and average FFO margin before interest and taxes slipping below 3% coupled with the simultaneous growth of leverage above 3,5х;
  • The average debt service indicator (the FFO before net interest payments to interest payments ratio) falls below 2,5х;
  • A significant deterioration of access to external sources of liquidity.

Rating components

Standalone creditworthiness assessment (SCA): bbb+.

Adjustments: 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 and is 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 credit rating assigned to Soyuzdorstroy LLC was first published by ACRA on December 29, 2017. The credit rating and its outlook are expected to be revised within one year following the rating action date (December 26, 2018).

The assigned credit rating is based on data provided by Soyuzdorstroy LLC, information from publicly available sources, as well as ACRA’s own databases. The credit rating is assigned on the basis of the consolidated IFRS financial statements of Soyuzdorstroy LLC. The credit rating is solicited, and Soyuzdorstroy LLC participated in its assignment.

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

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

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