Training on Forecasting September 17–18

ACRA assigns A+(RU) to DME Limited, outlook Stable

The credit rating assigned to DME Limited (hereinafter, the Company, Airport, or Domodedovo) stems from low industry risks coupled with the leading market position of the Company, its strong business profile and strong liquidity as well as high profitability. On the other hand, the credit rating is under pressure from medium leverage and medium level of corporate governance.

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

Key rating assessment factors

Low industry risks for DME Limited coupled with a leading market position. Infrastructure companies in the transportation industry have high entry barriers for new players. More often than not, airports represent natural monopolies, which predetermines lack of any direct competition between them. There are three airports in the Moscow Air Hub with the major passenger and cargo traffic in the Russian air transportation market. Domodedovo is the second largest airport in the Moscow Air Hub being only slightly behind the leader.

Strong business profile. Airport’s infrastructure is well developed: it includes two independent parallel runways and passenger and cargo terminals (256,000 sq. m and 13,400 sq. m, respectively). Fuel installations are capable of refilling 10 aircrafts per hour. By commissioning a new runway and gradual commissioning of new premises in the terminal, Airport’s capacity may increase after 2018. ACRA assesses the investment program implemented by the Company as large-scale with low flexibility. Domodedovo services passenger and cargo traffic of Moscow and Moscow Region that exhibit high social and economic development. Having a status of federal international airport the Company may service international flights of Russian airlines as well as accommodate departure and arrival flights of international airlines.

Medium leverage and high coverage. According to ACRA estimates, the debt of Domodedovo amounted to RUB 41.3 bln as at year-end 2016 comprising foreign currency-denominated loans and borrowings as well as debt under concession agreements. ACRA notes a substantial amount of the Company’s foreign currency commitments. Foreign currency revenue from servicing international flights represents somewhat of a natural hedge of FX risks. ACRA assesses leverage as medium as total debt to FFO before net interest payments ratio would stand at 3.6x by year-end 2017. Coverage is high: FFO before interest payments to interest payments would be 5.7x in 2017, according to ACRA estimates. We expect no significant changes in the leverage and coverage indicators of the Company in 2018-2019.

Medium size and high profitability. Following 2016 results, revenues of Domodedovo were at RUB 38.2 bln, and FFO before net interest payments and taxes stood at RUB 14.3 bln, which corresponds to a medium business size (according to ACRA classification). FFO margin before net interest payments and taxes was 39%. The Airport serviced 28.5 mln passengers, and the cargo traffic was 142,200 tons. In view of a significant increase in passenger traffic in 2017, ACRA expects revenues and FFO before net interest payments and taxes to grow by 9%. We expect the 2017 profitability to stand at 37%. ACRA expects no significant increase in the Company’s revenue and FFO before net interest payments and taxes.

Strong liquidity and weak cash flow. Debt obligations of Domodedovo are of long-term nature. The only large payment in the forecast period (2017-2019) is due in 2018 when the Company has to repay the first Eurobonds issue (USD 220 mln). This fact exerts pressure on the liquidity. We expect short-term liquidity ratio to be at 1.3x in 2018-2019. Another factor restraining liquidity is a massive investment program (we estimate the average capital expenditures to revenues ratio to be around 35% in 2017-2018), with the substantial spending involved driving free cash flow (FCF) into a negative territory. According to ACRA forecast, FCF margin of Domodedovo would be negative in 2017-2018 (around -15%), and in 2019 and thereafter, it would approach zero.

Medium level of corporate governance. Strategic plans of Domodedovo are primarily related to the Airport’s capacity increase and transport infrastructure development as well as operational efficiency improvement. In ACRA’s opinion, the strategy is not sufficiently formalized. The Company’s Board of Directors does not have enough rights, and management makes key decisions in view of the major shareholder’s interests. The bulk of Domodedovo’s property is on the books of a subsidiary registered in Cyprus. The group’s structure is complicated as various businesses are managed by separate legal entities, which, however, is economically justified. The Company has an established risk management system, the Agency, however, is concerned by the practice of making large dividend payouts while FCF is negative. Financial information disclosure is high enough.

Key assumptions

  • Successful refinancing of the first Eurobonds issue in 2018;
  • FFO margin before interest payments and taxes stays within the range of 35%-45%;
  • The trend is preserved for liberalization of the state tariff policy with respect to airport infrastructure;
  • Dividend payouts do not exceed RUB 4 bln;
  • 2%-4% of annual passenger traffic growth;
  • Substantial expenses are maintained to finance capital expenditures (of 30%-35% 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:

  • A decline of total debt to FFO before interest payments below 2.0x or increase of FFO before net interest payments to interest payments above 10x;
  • An increase of FCF margin after dividends above 2%;
  • A substantial cut of the capex program (below 15% of revenues);
  • A significant improvement in corporate governance practices as to the development of the board of directors as a management body as well as of the regulatory base governing its activities.

A negative rating action may be prompted by:

  • Annual dividend payouts exceeding RUB 5 bln;
  • Domestic and international passenger traffic declining by more than 10%-15% in 2018-2019 vs 2017;
  • Total debt to FFO before net interest payments to interest payments exceeding 4.0x or FFO before net interest payments to net interest payments dropping below 5.0x;
  • A loss of a large client, which may result in a financial performance decline of the Company;
  • FFO margin before net interest payments and taxes decreasing falling below 25%;
  • A 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

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 the Analytical Credit Rating Agency within the Scope of Its Rating Activities.

A credit rating has been assigned to DME Limited for the first time. The credit rating and its outlook are expected to be revised within one year following the rating action date (November 27, 2017).

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 rating is based on the data provided by DME Limited, information from publicly available sources, as well as ACRA’s own databases. The credit rating is solicited, and DME Limited participated in its 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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