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

The downgrade in the credit rating of DME Limited (hereinafter, the Company, the Group, Airport, or Domodedovo) to A-(RU) and the change in the outlook from Stable to Negative are based on the Company’s increased debt load amid the incoming cash flow decreasing on the backdrop of COVID-19 pandemic and depreciating ruble. In the mid-term, the rating will be under pressure from the upcoming maturity of Eurobonds (2021) and domestic bonds (2022). Nevertheless, ACRA retains the high assessments of the Company's business profile and geographic diversification. The Agency assumes that inclusion of Domodedovo in the list of systemically important companies may mitigate, to some extent, the risks facing the Airport's financial stability in the current business environment.

The bonds (ISIN RU000A0ZYM21, RU000A100J18) issued by Domodedovo Fuel Facilities Ltd., which are senior unsecured debt instruments, have also been downgraded to A-(RU), along with the Company's 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

Growing uncertainty about Company's operational performance indicators in 2020. Restrictions imposed on international flights and a significant decrease in domestic passenger volume have a negative impact on the operating and financial indicators of Domodedovo. The current uncertainty with respect to the duration of air transportation restrictions makes it difficult to forecast the performance dynamics of the Company. ACRA expects that the passenger traffic of the Airport may decline by about 35–40% by the end of 2020. Worsening macroeconomic situation in Russia, depreciating ruble, and dropping real household incomes (which will affect the demand for airline services after quarantine restrictions are lifted), as well as possible withdrawal of some airlines from the market, taken together, may slow down the recovery in the Company's operating indicators even after the epidemiological situation stabilizes.

Increase in leverage. Most of the Company debt is nominated in foreign currencies (US dollars, euros). Due to the favorable exchange rate, Domodedovo's debt at the end of 2019 was lower than it is today. The Company's leverage will further increase due to a fall in its revenues expected in 2020. The ratio of total debt to FFO to net interest payments, according to ACRA forecasts, will increase from 4.6x as of December 31, 2019 to 8.5–9.0x by the end of 2020, which is an indication of a very high leverage. The Agency believes that in 2021–2022, as the passenger air transportation market recovers, the Company's leverage may come back into the range of 4.5–5.0x.

Significant debt repayments over the next three years. Pressure on the rating is also exerted by peaks of debt repayments expected in the forecast period. In 2021, the Company will have to repay its Eurobonds for USD 350 mln, and in 2022, two domestic bond issues for a total of RUB 15 bln are also to be repaid. The Company announced that it is ready to reduce capital expenditures in 2020; however, the Agency is of the opinion that this will not be enough to generate positive free cash flow (FCF) in the current year. The Company has a restriction on new borrowings because the threshold ratio of net debt to EBITDA is 4.0x. Considering the stressful conditions in the air transportation market and high uncertainty in the financial markets, ACRA notes increased refinancing risks.

Key assumptions

  • Passenger volume decrease by 35–40% in 2020 vs 2019 and its further restoration up to the level of 2019 in two or three years;
  • The annual average USD/RUB exchange rate at 72.8 in 2020 and its further decline to 65–70 in 2021–2022;
  • Capital expenses not higher than RUB 2.5 bln in 2020.

Potential outlook or rating change factors

The Negative outlook assumes the possibility of a negative rating action over the next 12–18 months.

A positive rating action may be prompted by:

  • Clarification of state support measures for Moscow Aviation Hub airports, along with the trend for stronger ruble and stable economy;
  • Fast post-crisis restoration of the Company's operating performance amid decreasing leverage of the Company.

A negative rating action may be prompted by:

  • Dividend payout amid negative FCF;
  • A decline in passenger volume by more than 40% in 2020;
  • Further depreciation of ruble;
  • A decrease in the weighted ratio of FFO before net interest payments to interest payments below 2.5x;
  • Deteriorating liquidity.

Rating components

Standalone creditworthiness assessment (SCA): a-.

Adjustments: none.

Support: no.

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);

Bond loan, Exchange-traded interest-bearing certified bearer bonds issued by Domodedovo Fuel Facilities Ltd (ISIN RU000A100J18), maturity date: June 30, 2022, issue volume: RUB 5 bln, — A-(RU).

Rationale. The bond issues are senior unsecured debt obligations of Domodedovo Fuel Facilities Ltd., which is an operational subsidiary of DME Limited. The credit ratings were 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 bonds 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 issues 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 ratings of the issues are on par with the credit rating of DME Limited — A-(RU).

Regulatory disclosure

The credit ratings of DME Limited and the bonds (ISIN RU000A0ZYM21, RU000A100J18) 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 issues.

The credit ratings of DME Limited and the bonds (ISIN RU000A0ZYM21, RU000A100J18) issued by Domodedovo Fuel Facilities Ltd. were first published by ACRA on November 29, 2017, December 26, 2017, and July 4, 2019, respectively. The credit rating and outlook of DME Limited and the credit ratings of the bonds (ISIN RU000A0ZYM21, RU000A100J18) issued by Domodedovo Fuel Facilities Ltd. are expected to be revised within one year following the publication date of this press release.

The 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 and Domodedovo Fuel Facilities Ltd. No conflicts of interest were discovered in the course of credit rating assignment.

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