ACRA affirms AAA(RU) to JSCo “RZD”, outlook Stable, and affirms credit ratings of bond issues

The credit rating of Joint Stock Company “Russian Railways” (hereinafter, the Company) is on par with the financial obligations of the Russian Government, in view of the very high systemic importance of the Company for the Russian economy and the state’s very high influence on the Company.

The Company is a natural monopoly, one of the largest global railway companies, which owns and operates railway infrastructure, rolling stock and locomotives in Russia. The sole shareholder of the Company is the Russian Federation.

Key rating assessment factors

Very high systemic importance of the Company for the Russian economy and very high state influence on the Company’s creditworthiness. The systemic importance is very high because the Company is a natural monopoly, the largest employer, and an inseparable part of the national economy. The formation of the Company’s investment program is closely related to the state’s policy to develop the country’s transportation infrastructure in order to ensure that its regions are connected, as well as to stimulate sustainable and balanced spatial development of Russia. The Company’s tariff policy, which is approved by the Russian Government, is a decisive factor for many sectors of the economy, since the cost of transportation accounts for a significant part of the cost of a number of goods. The state influence is very high, as the state exercises operating and shareholding control over the Company, and subsidizes the Company and finances its investment program through the National Welfare Fund (NWF) and tax benefits. In 2019, the volume of state funding, including subsidies and contributions to charter capital, amounted to RUB 131 bln, including RUB 19.5 bln allocated from the NWF to finance the Baikal-Amur Main Line development program. In 2020, the Company will be provided with around RUB 150 bln in state support.

The Company’s standalone creditworthiness assessment (SCA) is aa- due to its very strong market position, strong business profile, very strong geographical diversification assessment, and high quality corporate governance. The assessment of the financial risk profile (amid average leverage and average debt service coverage) was a constraining factor in the SCA assessment, given the Company’s very low free cash flow (FCF) due to its large-scale investment program.

Average leverage and debt service. As of the end of 2019, the Company’s total debt to FFO before net interest ratio was 3.0x. ACRA expects this indicator to increase by the end of 2020 due to growth in the absolute value of debt (taking into account the perpetual bonds) and declining operating profits caused by the influence of the coronavirus pandemic on the Company’s passenger and freight traffic, but not exceed 5.5x, even taking into account the conservative operating profit forecast, which does not imply substantial improvement in H2 2020 compared to H1 2020. ACRA expects leverage to decline to 3.2x as operating profits recover in 2021. The debt service indicator (FFO before interest payments to interest payments ratio) stood at 5.3x as of the end of 2019 (compared to 6.3x as of the end of 2018). According to ACRA’s assessments, the decline in the Company’s operating profits in 2020 will result in the debt service indicator falling to 3.0 this year. However, this indicator should climb to 5.2x as the Company’s profits recover in 2021.

Negative FCF and strong liquidity position. The Company continues to generate negative FCF because of its large-scale investment program. ACRA expects the Company’s FCF to be negative until 2023. The weighted capital expenditures to revenue ratio for 2018–2023 is 28.1%. ACRA notes a certain flexibility of the Company in implementing its capital development program, including depending on state funding for projects initiated by the state.

ACRA assesses the Company’s liquidity as very strong. The Company maintains a consistently high volume of funds in its accounts (around RUB 100 bln), while available undrawn credit lines amount to around RUB 1.3 tln. These funds are more than sufficient to refinance debt in the short term and the long term. The amount of debt to be repaid by the end of 2021 is around RUB 150 bln, taking into account ruble bond put options.

Key assumptions

  • Total amount of annual state support, including subsidies and contributions to the charter capital, at not less than RUB 50 bln;
  • Implementation of the capital investment program will not lead to a breach of the restrictions imposed by the financial strategy (net debt to EBITDA ratio of no higher than 3.0x) in the long term;
  • Balanced dividend policy that takes into account market conditions, high capital expenditures, and the need to maintain moderate leverage.

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 negative rating action may be prompted by:

  • Significant decline in the systemic importance of the Company for the Russian economy;
  • Loss of shareholding control on the part of the state or a substantial decrease of volume of financial support.

Rating components

SCA: аа-

Support: on par with the RF.

Issue ratings

Key issue properties of senior unsecured debt

Rationale. The issues listed below represent senior unsecured debt of the Company. Due to the absence of either structural or contractual subordination of the issues, ACRA ranks them as pari passu with other existing and future unsecured and unsubordinated debt obligations of the Company.

In accordance with ACRA’s methodology, and taking into account the high creditworthiness and moderate leverage of the issuer, as well as the absence of secured debt obligations, ACRA rates the bond issues AAA(RU), on par with the credit rating of Joint Stock Company “Russian Railways”.

  1. Certified interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series 19 (RU000A0JQ7Z2), maturity date: July 8, 2024, issue volume: RUB 10 bln — АAА(RU).
  2. Certified interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series 23 (RU000A0JQRD9), maturity date: January 16, 2025, issue volume: RUB 15 bln — АAА(RU).
  3. Certified interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series 32 (RU000A0JSGV0), maturity date: June 25, 2032, issue volume: RUB 10 bln — АAА(RU).
  4. Certified interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series 28 (RU000A0JTU85), maturity date: March 21, 2028, issue volume: RUB 20 bln — АAА(RU).
  5. Certified interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series 30 (RU000A0JUAH8), maturity date: November 7, 2028, issue volume: RUB 15 bln — АAА(RU).
  6. Certified interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series 33 (RU000A0JVB19), maturity date: February 28, 2040, issue volume: RUB 15 bln — АAА(RU).
  7. Certified interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series 34 (RU000A0JVB27), maturity date: February 28, 2040, issue volume: RUB 15 bln — АAА(RU).
  8. Certified interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series 35 (RU000A0JVKH5), maturity date: May 30, 2040, issue volume: RUB 15 bln — АAА(RU).
  9. Certified interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series 36 (RU000A0JVY04), maturity date: October 15, 2040, issue volume: RUB 15.2 bln — АAА(RU).
  10. Certified interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series 41 (RU000A0JX1S1), maturity date: November 27, 2031, issue volume: RUB 15 bln — АAА(RU).
  11. Certified interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series 42 (RU000A0JWLU4), maturity date: May 22, 2046, issue volume: RUB 15 bln — АAА(RU).
  12. Certified exchange-traded interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series BO-18 (RU000A0JTY57), maturity date: April 29, 2043, issue volume: RUB 25 bln — АAА(RU).
  13. Certified exchange-traded interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series BO-09 (RU000A0JTZM7), maturity date: June 8, 2028, issue volume: RUB 25 bln — АAА(RU).
  14. Certified exchange-traded interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series BO-12 (RU000A0JU542), maturity date: August 18, 2033, issue volume: RUB 25 bln — АAА(RU).
  15. Certified exchange-traded interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series BO-13 (RU000A0JU7B7), maturity date: September 19, 2033, issue volume: RUB 25 bln — АAА(RU).
  16. Certified exchange-traded interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series BO-15 (RU000A0JU9M0), maturity date: October 11, 2038, issue volume: RUB 25 bln — АAА(RU).
  17. Certified exchange-traded interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series BO-10 (RU000A0JUCG6), maturity date: November 29, 2028, issue volume: RUB 25 bln — АAА(RU).
  18. Certified exchange-traded interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series BO-19 (RU000A0JUPZ8), maturity date: May 20, 2044, issue volume: RUB 25 bln — АAА(RU).
  19. Certified exchange-traded interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series BO-16 (RU000A0JUX71), maturity date: September 20, 2039, issue volume: RUB 25 bln — АAА(RU).
  20. Certified exchange-traded interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series BO-14 (RU000A0JVJS4), maturity date: May 29, 2035, issue volume: RUB 17 bln — АAА(RU).
  21. Certified exchange-traded interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series BO-02 (RU000A0JVW71), maturity date: October 16, 2025, issue volume: RUB 15 bln — АAА(RU).
  22. Certified exchange-traded interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series BO-07 (RU000A0JWC82), maturity date: March 25, 2026, issue volume: RUB 20 bln — АAА(RU).
  23. Certified exchange-traded interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series BO-05 (RU000A0JWD57), maturity date: April 3, 2026, issue volume: RUB 10 bln — АAА(RU).
  24. Certified exchange-traded interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series BO-17 (RU000A0JWHU2), maturity date: April 26, 2041, issue volume: RUB 15 bln — АAА(RU).
  25. Certified exchange-traded interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series BO-11 (RU000A0JXJK7), maturity date: February 4, 2032, issue volume: RUB 15 bln — АAА(RU).
  26. Certified exchange-traded interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series 001Р-01R (RU000A0JXN05), maturity date: May 18, 2032, issue volume: RUB 15 bln — АAА(RU).
  27. Certified exchange-traded interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series 001P-02R (RU000A0JXQ44), maturity date: April 2, 2037, issue volume: RUB 15 bln — АAА(RU).
  28. Certified exchange-traded interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series 001P-03R (RU000A0JXR84), maturity date: April 23, 2037, issue volume: RUB 15 bln — АAА(RU).
  29. Certified exchange-traded interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series 001P-04R (RU000A0JXZB2), maturity date: July 29, 2032, issue volume: RUB 15 bln — АAА(RU).
  30. Exchange-traded interest-bearing non-convertible certified bearer bond issued by JSCo “RZD”, series 001P-09R (RU000A0ZZRY2), maturity date: October 14, 2033, issue volume: RUB 10 bln — АAА(RU).
  31. Certified interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series 001P-08R (RU000A0ZZGT5), maturity date: August 3, 2028, issue volume: RUB 10 bln — АAА(RU).
  32. Certified interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series 001P-07R (RU000A0ZZ9R4), maturity date: May 26, 2033, issue volume: RUB 10 bln — АAА(RU).
  33. Certified interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series 001P-06R (RU000A0ZZ4P9), maturity date: April 4, 2033, issue volume: RUB 15 bln — АAА(RU).
  34. Certified interest-bearing non-convertible unregistered bond issued by JSCo “RZD”, series 001P-05R (RU000A0ZYU05), maturity date: February 1, 2033, issue volume: RUB 20 bln — АAА(RU).
  35. Certified interest-bearing non-convertible unregistered bond subject to mandatory centralized custody issued by JSCo “RZD”, series 001P-10R (RU000A0ZZX19), maturity date: June 3, 2022, issue volume: RUB 10 bln — АAА(RU).
  36. Certified interest-bearing non-convertible unregistered bond subject to mandatory centralized custody issued by JSCo “RZD”, series 001P-11R (RU000A0ZZXL7), maturity date: May 10, 2022, issue volume: RUB 10 bln — АAА(RU).
  37. Certified interest-bearing non-convertible unregistered bond subject to mandatory centralized custody issued by JSCo “RZD”, series 001P-12R (RU000A1002C2), maturity date: January 26, 2024, issue volume: RUB 15 bln — АAА(RU).
  38. Certified interest-bearing non-convertible unregistered bond subject to mandatory centralized custody issued by JSCo “RZD”, series 001P-13R (RU000A1007Z2), maturity date: March 19, 2029, issue volume: RUB 20 bln — АAА(RU).
  39. Certified interest-bearing non-convertible unregistered bond subject to mandatory centralized custody issued by JSCo “RZD”, series 001P-14R (RU000A1008D7), maturity date: May 4, 2029, issue volume: RUB 11 bln — АAА(RU).
  40. Certified interest-bearing non-convertible unregistered bond subject to mandatory centralized custody issued by JSCo “RZD”, series 001P-15R (RU000A1009L8), maturity date: April 7, 2027, issue volume: RUB 15 bln — АAА(RU).
  41. Certified interest-bearing non-convertible unregistered bond subject to mandatory centralized custody issued by JSCo “RZD”, series 001P-16R (RU000A100HY9), maturity date: June 25, 2026, issue volume: RUB 30 bln — АAА(RU).
  42. Certified interest-bearing unregistered bond issued by JSCo “RZD”, series 001P-17R (RU000A1010M4), maturity date: November 3, 2025, issue volume: RUB 15 bln — АAА(RU).
  43. Certified interest-bearing unregistered bond issued by JSCo “RZD”, series 001P-18R (RU000A101H84), maturity date: February 20, 2030, issue volume: RUB 15 bln — АAА(RU).
  44. Certified interest-bearing unregistered bond subject to centralized custody  issued by JSCo “RZD”, series 001P-19R (RU000A101LS1), maturity date: April 15, 2027, issue volume: RUB 10 bln — АAА(RU).
  45. Certified interest-bearing non-convertible unregistered bond subject to centralized custody issued by JSCo “RZD”, series 001P-19R (RU000A101M04), maturity date: March 15, 2027, issue volume: RUB 15 bln — АAА(RU).

Key issue properties of unsecured perpetual debt (with the option of redemption at the discretion of the issuer)

Rationale. The terms of the issues listed below provide that the Company may decide not to pay any coupon, without any liability for such non-payment. Taking into account the subordination of the rated issues in relation to the senior unsecured debt of the issuer, which has an ACRA rating of AAA (RU), as well as the factor of full compensation to investors for lost income (in accordance with Resolution of the Government of the Russian Federation No. 1380 dated August 9, 2020) if Joint Stock Company “Russian Railways” decides not to pay the coupon, the issues below have been assigned a rating one notch below the issuer’s rating — AA+ (RU).

  1. Perpetual callable uncertified non-convertible interest-bearing bond issued by JSCo “RZD” subject to centralized title registration, series 001B-01 (RU000A101TT2), issue volume: RUB 30 bln — АА+(RU).
  2. Perpetual callable uncertified non-convertible interest-bearing bond issued by JSCo “RZD” subject to centralized title registration, series 001B-02 (RU000A101Y18), issue volume: RUB 20 bln — АА+(RU).
  3. Perpetual callable uncertified non-convertible interest-bearing bond issued by JSCo “RZD” subject to centralized title registration, series 001B-03 (RU000A102564), issue volume: RUB 100 bln — АА+(RU).
  4. Perpetual callable uncertified non-convertible interest-bearing bond issued by JSCo “RZD” subject to centralized title registration, series 001B-04 (RU000A1028U9), issue volume: RUB 80 bln — АА+(RU).

Regulatory disclosure

The credit ratings of Joint Stock Company “Russian Railways” and the bond issues (ISIN RU000A0JQ7Z2, ISIN RU000A0JQRD9, ISIN RU000A0JSGV0, ISIN RU000A0JTU85, ISIN RU000A0JTY57, ISIN RU000A0JTZM7, ISIN RU000A0JU542, ISIN RU000A0JU7B7, ISIN RU000A0JU9M0, ISIN RU000A0JUAH8, ISIN RU000A0JUCG6, ISIN RU000A0JUPZ8, ISIN RU000A0JUX71, ISIN RU000A0JVB19, ISIN RU000A0JVB27, ISIN RU000A0JVJS4, ISIN RU000A0JVKH5, ISIN RU000A0JVW71, ISIN RU000A0JVY04, ISIN RU000A0JWC82, ISIN RU000A0JWD57, ISIN RU000A0JWHU2, ISIN RU000A0JWLU4, ISIN RU000A0JX1S1, ISIN RU000A0JXJK7, ISIN RU000A0JXN05, ISIN RU000A0JXQ44, ISIN RU000A0JXR84, ISIN RU000A0JXZB2, ISIN RU000A0ZZRY2, ISIN RU000A0ZZGT5, ISIN RU000A0ZZ9R4, ISIN RU000A0ZZ4P9, ISIN RU000A0ZYU05, ISIN RU000A0ZZX19, ISIN RU000A0ZZXL7, ISIN RU000A1002C2, ISIN RU000A1007Z2, ISIN RU000A1008D7, ISIN RU000A1009L8, ISIN RU000A100HY9, ISIN RU000A1010M4, ISIN RU000A101H84, ISIN RU000A101LS1, ISIN RU000A101M04, ISIN RU000A101TT2, ISIN RU000A101Y18, ISIN RU000A102564, ISIN RU000A1028U9) have been 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, the Methodology for Analyzing Relationships Between Rated Entities and the State, 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 for the Russian Federation was also applied to assign credit ratings to the issues.

The credit rating assigned to Joint Stock Company “Russian Railways” and credit ratings assigned to the bonds (ISIN RU000A0JQ7Z2, ISIN RU000A0JQRD9, ISIN RU000A0JSGV0, ISIN RU000A0JTU85, ISIN RU000A0JTY57, ISIN RU000A0JTZM7, ISIN RU000A0JU542, ISIN RU000A0JU7B7, ISIN RU000A0JU9M0, ISIN RU000A0JUAH8, ISIN RU000A0JUCG6, ISIN RU000A0JUPZ8, ISIN RU000A0JUX71, ISIN RU000A0JVB19, ISIN RU000A0JVB27, ISIN RU000A0JVJS4, ISIN RU000A0JVKH5, ISIN RU000A0JVW71, ISIN RU000A0JVY04, ISIN RU000A0JWC82, ISIN RU000A0JWD57, ISIN RU000A0JWHU2, ISIN RU000A0JWLU4, ISIN RU000A0JX1S1, ISIN RU000A0JXJK7, ISIN RU000A0JXN05, ISIN RU000A0JXQ44, ISIN RU000A0JXR84, ISIN RU000A0JXZB2) were published by ACRA for the first time on November 16, 2017. The credit ratings assigned to the bonds (ISIN RU000A0ZZRY2, ISIN RU000A0ZZGT5, ISIN RU000A0ZZ9R4, ISIN RU000A0ZZ4P9, ISIN RU000A0ZYU05, ISIN RU000A0ZZX19, ISIN RU000A0ZZXL7, ISIN RU000A1002C2, ISIN RU000A1007Z2, ISIN RU000A1008D7, ISIN RU000A1009L8, ISIN RU000A100HY9, ISIN RU000A1010M4, ISIN RU000A101H84, ISIN RU000A101LS1, ISIN RU000A101M04, ISIN RU000A101TT2, ISIN RU000A101Y18, ISIN RU000A102564, ISIN RU000A1028U9) were published by ACRA for the first time on November 2, 2018, August 16, 2018, June 14, 2018, April 23, 2018, February 19, 2018, December 7, 2018, December 12, 2018, February 1, 2019, April 1, 2019, April 4, 2019, April 17, 2019, July 4, 2019, November 11, 2019, March 4, 2020, April 23, 2020, April 24, 2020, June 26, 2020, July 31, 2020, September 30, 2020, and October 22, 2020, respectively.

The credit rating of Joint Stock Company “Russian Railways” and its outlook and the credit ratings of the bonds issued by Joint Stock Company “Russian Railways” (ISIN RU000A0JQ7Z2, ISIN RU000A0JQRD9, ISIN RU000A0JSGV0, ISIN RU000A0JTU85, ISIN RU000A0JTY57, ISIN RU000A0JTZM7, ISIN RU000A0JU542, ISIN RU000A0JU7B7, ISIN RU000A0JU9M0, ISIN RU000A0JUAH8, ISIN RU000A0JUCG6, ISIN RU000A0JUPZ8, ISIN RU000A0JUX71, ISIN RU000A0JVB19, ISIN RU000A0JVB27, ISIN RU000A0JVJS4, ISIN RU000A0JVKH5, ISIN RU000A0JVW71, ISIN RU000A0JVY04, ISIN RU000A0JWC82, ISIN RU000A0JWD57, ISIN RU000A0JWHU2, ISIN RU000A0JWLU4, ISIN RU000A0JX1S1, ISIN RU000A0JXJK7, ISIN RU000A0JXN05, ISIN RU000A0JXQ44, ISIN RU000A0JXR84, ISIN RU000A0JXZB2, ISIN RU000A0ZZRY2, ISIN RU000A0ZZGT5, ISIN RU000A0ZZ9R4, ISIN RU000A0ZZ4P9, ISIN RU000A0ZYU05, ISIN RU000A0ZZX19, ISIN RU000A0ZZXL7, ISIN RU000A1002C2, ISIN RU000A1007Z2, ISIN RU000A1008D7, ISIN RU000A1009L8, ISIN RU000A100HY9, ISIN RU000A1010M4, ISIN RU000A101H84, ISIN RU000A101LS1, ISIN RU000A101M04, ISIN RU000A101TT2, ISIN RU000A101Y18, ISIN RU000A102564, ISIN RU000A1028U9) 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 Joint Stock Company “Russian Railways,” information from publicly available sources, as well as ACRA’s own databases. The credit ratings are based on the consolidated IFRS financial statements of Joint Stock Company “Russian Railways”. The credit ratings are solicited, and Joint Stock Company “Russian Railways” participated in their assignment.

Disclosure of deviations from the methodology. According to the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale for the Russian Federation, if the borrower’s failure to fulfill certain financial obligations featuring debt characteristics does not result in the issuer’s default, the final credit rating of these financial obligations is set five notches lower than the issuer’s SCA. Taking into account the subordination of the rated issues in relation to the senior unsecured debt of the issuer, which has an ACRA rating of AAA (RU), as well as the factor of full compensation to investors for lost income (in accordance with Resolution of the Government of the Russian Federation No. 1380 dated August 9, 2020) if Joint Stock Company “Russian Railways” decides not to pay the coupon, the issues ISIN RU000A101TT2, ISIN RU000A101Y18, ISIN RU000A102564, ISIN RU000A1028U9 have been assigned a rating one notch below the issuer’s rating — AA+ (RU).

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

ACRA provided additional services to Joint Stock Company “Russian Railways”. No conflicts of interest were discovered in the course of credit rating assignment.

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