Training on sovereign risk credit analysis, October 24

ACRA downgrades the credit rating of DME Limited to A(RU), changes outlook to Stable, and downgrades bonds (RU000A0ZYM21) issued by Domodedovo Fuel Facilities Ltd. to A(RU)

The downgrade in the credit rating of DME Limited (hereinafter, the Company, Airport, or Domodedovo) is based on the Company’s increased debt load amid decreasing passenger volume. The Company is still characterized by low industry risks combined with leading market positions, a strong business profile, and high profitability. The average level of corporate management puts pressure on the rating.

DME Limited is a group of companies that owns and operates the Domodedovo airport. The Airport is the second largest in Russia in terms of passenger and cargo volume. Dmitry Kamenshchik is the ultimate controlling beneficiary of the Company.

Key rating assessment factors

Continued tendencies of debt load growth. According to ACRA, the Company’s debt amounted to RUB 60 bln at the end of 2018 and was primarily made up of Eurobonds (close to 70%). A significant exchange loss led to an increase in the debt load at the end of 2018; the ratio of debt to FFO before net interest payments stood at 4.76x (4.00 in 2017), which ACRA assesses as average. The peak value of the exchange rate at the reporting date creates a certain distortion in the calculation of the debt load, but the recalculation at the average rate for the first half of 2019 does not lead to a change in the assessment of this factor. Interest payment coverage in 2018 decreased to 3.36x (5.16x in 2017), although it is at a satisfactory level. In addition to the exchange loss, additional interest expenses on the new Eurobond issue, which was placed significantly earlier than the maturity date of the refinanced issue, also affected the decrease in coverage.

Non-ruble revenue from international flight servicing (53% of revenues denominated in foreign currency) creates some natural hedging of currency risk. At the same time, the decrease in passenger volume in 2018 (down 4.1% from 2017) partially nullified this effect, which lead to FFO before net interest payments and taxes remaining at the same level as 2017. Passenger volume continues to decrease in 2019, which, according to ACRA, could amount to 6.7%. Therefore, ACRA expects the ratio of total debt to FFO before net interest payments and the ratio of FFO before net interest payments to interest payments to be 4.97x and 3.80x in 2019, respectively. ACRA forecasts that in the absence of external economic shocks, a gradual improvement in debt metrics is possible in 2020 and 2021. However, this will not lead to a revision of the factor's assessment.

Strong liquidity and very weak free cash flow. In 2016-2018, the Company’s FCF was negative (FCF margin was -28% at the end of 2018) because of significant capital expenses and the maintenance of dividend payment. ACRA expects the Company’s CAPEX to decline starting from 2019, which may have a positive impact on its cash flow. However, according to ACRA’s forecast, FCF will remain negative, which negatively affects the liquidity assessment. In the first half of 2018, the Company had certain restrictions on new borrowings, but in  Q12019, bondholders approved the increase in the threshold of net debt/EBITDA from 3.0х to 4.0х, which allowed the Company to retain access to external sources of liquidity, and now the Company benefits from a significant amount of committed loan facilities. Therefore, according to ACRA estimates, the average short-term liquidity indicator should amount to 4.5х in 2019-2021, which ACRA assesses as high. At the same time, ACRA notes that in case the leverage increases further, the above sources of liquidity may become inaccessible because the ratio of net debt to EBITDA is close to the threshold value. As calculated without the committed loan facilities, the short-term liquidity indicator should be 2.6x, which, in ACRA's opinion, is also high.

Low industry risks and strong market positions. Transport infrastructure companies generally have high entry barriers for new players. Oftentimes, airports are natural monopolies that do not compete with each other.  There are three airports in the Moscow Air Hub serving the bulk of passenger and cargo traffic in the Russian air transportation market. Domodedovo is the second largest airport in the Moscow Air Hub. The Agency notes that in 2018, Domodedovo passenger volume amounted to 29.4 mln people (30.7 mln in 2017). However, regardless of the current trend for shrinking passenger volume, the Agency is expecting the passenger volume of the Company to grow after the new segment of the airport terminal is commissioned, which will improve operating performance in the future.

Key assumptions

  • FFO before interest payments and taxes remaining within 30%-35%;
  • Maintained trend for liberalization of the state tariff policy with respect to airport infrastructure;
  • Dividend payouts no higher than RUB 4 bln;
  • Passenger volume declining by no more than 6.73% annually;
  • Capital expenses remaining lower than 20% of revenues.

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:

  • Decrease in total debt to FFO before net interest payments below 3.0x and increase in FFO before net interest payments to interest payments above 5.0x;
  • Significant improvement in corporate management, including the board of directors and the internal regulatory framework;
  • Significant increase in FCF (above 2%).

A negative rating action may be prompted by:

  • Further decline in domestic and international passenger volume by more than 10% in 2019-2020 vs 2018;
  • Increase in weighted ratio of total debt to FFO before net interest payments above 6.0x;
  • Decrease in FFO before net interest payments to interest payments below 2.0x;
  • Loss of a large client, which could lead to a decline in the Company’s financial performance;
  • Substantially worse access to external sources of liquidity;
  • A change in the state tariff policy for airport infrastructure.

Rating components

Standalone creditworthiness assessment (SCA): a.

Adjustments: none.

Issue ratings

Bond loan, Exchange-traded interest-bearing certified bearer bonds issued by Domodedovo Fuel Facilities Ltd (ISIN RU000A0ZYM21), maturity date: December 20, 2022, issue volume: RUB 10 bln, — A(RU).

Credit rating rationale. The bond issue is a senior unsecured debt obligation of Domodedovo Fuel Facilities Ltd. (hereinafter, the Issuer), which is an operational subsidiary of DME Limited. The credit rating was assigned on the basis of public irrevocable offers from DME Limited as a holding company and from key operational companies of the holding company generating the bulk of the Group’s cash flow. The list of offerers is identical to the list of companies acting as sureties under Eurobonds issued by the Group, which, in ACRA’s opinion, is indicative of no structural subordination of the issues. Therefore, and in view of no contractual subordination, ACRA ranks the bond pari passu with other existing and future unsecured and unsubordinated obligations of the Company. At the same time, ACRA notes the lack of a suretyship from the owner of Domodedovo’s assets – Hacienda Limited (Cyprus) – with respect to both the rated bond issue and Eurobonds issued earlier. In view of the above, ACRA used a detailed approach to assess loss recovery rate. According to ACRA’s methodology, the recovery rate for Domodedovo’s unsecured debt is classified into the second category, and therefore, the credit rating of the issue is on par with the credit rating of DME Limited — A(RU).

Regulatory disclosure

The credit ratings of DME Limited and the bond (ISIN RU000A0ZYM21) issued by Domodedovo Fuel Facilities Ltd., a subsidiary of DME Limited, were 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 Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments Under the National Scale of the Russian Federation was also used in the credit rating assignment of the specified issue.

The credit ratings of DME Limited and the bond (ISIN RU000A0ZYM21) issued by Domodedovo Fuel Facilities Ltd. were first published by ACRA on November 29, 2017 and December 26, 2017, respectively. The credit rating and outlook of DME Limited and the credit rating of the bond (ISIN RU000A0ZYM21) issued by Domodedovo Fuel Facilities Ltd. are expected to be revised within one year following the publication date of this press release.

Disclosure of deviations from approved methodologies: the profitability factor was assessed with a deviation from the assessment range as specified in the methodology.

The assigned credit ratings are based on the data provided by DME Limited, information from publicly available sources, as well as ACRA’s own databases. The credit ratings are solicited, and DME Limited participated in their assignment.

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

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

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