ACRA affirms AA(RU) to the State Company “Russian Highways,” outlook Stable, and AA(RU) to bond issues

The credit rating of the State Company “Russian Highways” (hereinafter, the Company) is on par with that of the Russian Federation, minus two notches, and based on very strong state influence. The state exercises absolute operational and financial control over the Company. The Company’s activities in asset management and federal road construction and reconstruction are fully subsidized by the federal budget. The two-notch reduction is based on the systemic importance of the Company, which is assessed as high but not maximum, as toll roads are not critical for the development of Russia’s transport infrastructure in view of toll-free alternatives.

Key rating assessment factors

High systemic importance. The Company was established based on a separate federal law, No 145-FZ, dated July 17, 2009, “On the State Company ‘Russian highways’” with the purpose of implementing a wide range of tasks. These tasks include the following: connecting highways to six metropolitan areas, as well as two major Russian ports; raising large-scale private investment and transitioning to a new contract system; improving living standards for Russia’s population through improved transport accessibility; improving road safety on Russian’s highways; increasing the competitiveness of Russian economic sectors in world markets by reducing the transport component in the final price of products. The Company acts as a public contracting authority in the design, construction, and operation of highways and implements government decisions on the formation of the “North-South” and “West-East” transit road corridors in Russia. All these factors determine the Company’s status as strategically important for the state. The Company is currently the largest operator of toll highways in Russia with a total length of 1,459 km, putting 43% of all federal roads under the Company’s management (3,412 km). The Company’s business program is approved by a government decree. The latest decree, No 44-R, dated January 21, 2020, approves the Company’s business program until 2024 and states that the total length of federal roads under the Company’s management should be 4,679 km by 2024. The total amount of funds related to the Company’s activities in asset management in 2020-2024 should amount to RUB 1.155 tln. When determining the systemic importance of the Company for the state, ACRA also takes into account the scale of the Company’s activities and the extent of its impact on the economy. Despite the fact that the Company manages only 6% of all federal roads in Russia by length, this figure will grow in the future and traffic on these roads will increase. The Company’s theoretical default could entail reputational risks for the state and state budget risks, as a breach of concession agreements could trigger compensatory payments to concessionaires.

Very strong state influence. The state is the sole founder of the Company and exercises full operational and financial control over its activities. The Company’s Supervisory Board, its highest management body, includes representatives from various government departments, including representatives of the Ministry of Transport, the Auditing Chamber, the Federation Council, and the Ministry of Finance. The Board provides operational management for the Company and approves its strategy and development program, which are then approved by the government and form the basis of the Company’s activities.

The Company’s activities are financed primarily from the federal budget and state-owned funds. However, according to the Company’s established practice, projects with high capital intensity or social significance are financed to a greater extent by the state budget and less by private capital. No decision to raise market financing can be made unless the relevant federal budget expenditures are approved. The Company’s access to extraordinary budget financing is limited and time consuming due to the need to alter the federal budget. The Company may carry some expenses forward, and any undrawn subsidy is carried forward as well. The Company has seen a gradual increase in income from asset management activities, the main part of which is formed by revenue from collecting vehicle tolls, which increased from RUB 12.5 bln in 2018 to RUB 18.3 bln in 2019 (+46%). Toll collection and federal budget subsidies are a source of financing for the fulfillment of service obligations and repayment on bond loans.

Comfortable funding structure and adequate liquidity. ACRA notes the Company’s adequate liquidity. As of April 1, 2020, the Company had RUB 14.9 bln in cash. The Company’s total expenses in 2020-2024 are estimated at RUB 1.57 tln, which are fully covered by sources of financing, most of which are federal budget funds.

The volume of issued bonds as of December 31, 2019, amounted to RUB 166.1 bln, of which about 60% was placed at the expense of the National Wealth Fund at a reduced coupon rate and with a comfortable repayment schedule. According to the current business plan of the Company until 2024, the total volume of its loan portfolio could reach RUB 268.5 bln. Despite the absence of explicit state guarantees pertaining to existing and future market-originated debt, as well as the lack of formal state guarantees related to the Company’s obligations (federal law No. 145-FZ), ACRA expects that, in accordance with the Company’s business program, most of the Company’s obligations on bond loans will be financed with subsidies from the federal budget and income from asset management activities. However, as revenues from the asset management segment grow, their role in servicing the debt load will increase.

Key assumptions

  • Maintaining the current amount of subsidies allocated from the federal budget;
  • Debt servicing at the expense of the federal budget (principal debt and no more than 50% of coupon payments).

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:

  • Increase in the Company’s systemic importance for the state and significant expansion of its functions.

A negative rating action may be prompted by:

  • Substantial decline in the allocated budget subsidies, specifically those related to debt servicing;
  • Decrease in the Company’s systemic importance, in particular due to transferring its functions to other market players.

Rating components

SCA: none.

Adjustments: none.

Support: State — on par with the Russian Federation minus 2 notches.

Issue ratings

Certified exchange-traded interest-bearing unregistered bond issued by the State Company Russian Highways (RU000A1017H9), maturity date: December 12, 2029, issue volume: 27,280,200,000 — AA(RU).

Certified exchange-traded interest-bearing non-convertible unregistered bond issued by the State Company Russian Highways (RU000A100MV5), maturity date: February 25, 2021, issue volume: RUB 8,300,000,000 — AA(RU).

Certified exchange-traded interest-bearing non-convertible unregistered bond issued by the State Company Russian Highways (RU000A100B40), maturity date: April 23, 2021, issue volume: RUB 10,000,000,000 — AA(RU).

Credit rating rationale. The above bond issues are senior unsecured debt obligations of the State Company Russian Highways. Due to the absence of either structural or contractual subordination of the bonds, ACRA ranks them pari passu with other existing and future unsecured and unsubordinated obligations of the Company. ACRA expects that in accordance with the business program of the State Company “Russian Highways,” as amended by Government Decree No 44-R, dated January 21, 2020, the repayment of principal (par value bonds) on bonds raised to finance the accelerated construction of highway M-11 “Moscow–Saint-Petersburg” is planned to be implemented with subsidies from the federal budget. However, coupon payments on issued bonds are also planned to be provided with subsidies from the federal budget by no more than 50%. According to ACRA’s methodology, the credit ratings of the bonds are on par with the credit rating of the Company, i.e. AA(RU).

Regulatory disclosure

The credit ratings were assigned to the State Company “Russian Highways” and bonds (RU000A1017H9, RU000A100MV5, RU000A100B40) issued by the State Company “Russian Highways” under the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Banks and Bank Groups 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 applied to assign the credit ratings to the above bond issues.

The credit ratings of the State Company “Russian Highways” and bonds (RU000A1017H9, RU000A100MV5, RU000A100B40) issued by the State Company “Russian Highways” were first published by ACRA on June 2, 2017, December 24, 2019, July 26, 2019, and April 26, 2019, respectively. The credit rating of the State Company “Russian Highways” and its outlook as well as the credit rating of the above bonds 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 the State Company “Russian Highways”, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using consolidated IFRS financial statements of the State Company “Russian Highways.” The credit ratings are solicited, and the State Company “Russian Highways” participated in the rating process.

No material discrepancies between the provided data and the data officially disclosed by the State Company “Russian Highways” in its financial statements have been discovered.

ACRA provided no additional services to the State Company “Russian Highways.” No conflicts of interest were discovered in the course of credit rating process.

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