(The following statement was released by the rating agency)
Oct 09 - Fitch Ratings has affirmed Ventrelt Holdings Ltd's (Ventrelt or the group)Long-term foreign currency Issuer Default Rating (IDR) at 'BB-' with Stable Outlook. Fitch hasalso affirmed the senior unsecured rating of RVK-Finance LLC's RUB3bn bonds at 'BB-'. A fulllist of rating actions is at the end of this release.
The ratings of Ventrelt, a leading Russian private water and wastewateroperator, reflect the company's long-term concession agreements withmunicipalities to provide essential infrastructure services, its moderateleverage and existing funding structure. Ventrelt operates under the name ofRosvodokanal and serves over six million customers in several large cities inRussia and one in Ukraine. Ventrelt's ratings are constrained by its limitedsize and diversification relative to larger peers and 'BB' rated Russiancompanies, as well as the existing regulatory framework in the RussianFederation pertaining to concession agreements and tariff setting.
In 2011, Ventrelt reported revenues of RUB14.3bn, a 9.6% increase yoy mainly dueto higher water and wastewater tariffs. The group's net debt/EBITDA in 2011decreased to 1.5x from 1.7x at end-2010. To better capture operationalperformance, Fitch calculates net debt/connection fee adjusted EBITDA, whichdecreased to 2.6x at end-2011 (deducting connection fees, the capital elementincluded in EBITDA). This ratio is expected to remain below 4x in the mediumterm. EBITDA-based gross interest cover amounted to 4.4x at end-2011. Fitchexpects that interest cover will remain comfortably above 3x at the currentrating level. The agency believes that Ventrelt's capex will be contained atlevels commensurate with available cash flows and long-term borrowings.
At end-2011 Ventrelt's short-term debt maturities were RUB2bn, including theRUB1.4bn EBRD loan due in 2021. The company reclassified the EBRD loan asshort-term as one of the borrowers, Kaluzhskiy Oblastnoy Vodokanal LLC, breacheda loan covenant at end-2011. In March 2012, Ventrelt received a waiver from EBRDwith respect to this covenant breach. Therefore, Fitch treats this EBRD loan aslong-term in its liquidity analysis at end-2011. The group's remainingshort-term borrowings of RUB600m compared well with cash and cash equivalents ofRUB1.1bn at that date.
The RUB3bn bonds issued by RVK-Finance LLC benefit from sureties provided on ajoint and several basis by several group's subsidiaries including KaluzhskyOblastnoy Vodokanal LLC. In March 2012, Ventrelt sold its 100% stake inKaluzhsky Oblastnoy Vodokanal LLC and agreed with the buyer that its surety willremain in place until 2015. In turn, Barnaulskiy Vodokanal LLC, a fully-ownedgroup subsidiary, issued a surety to Kaluzhsky Oblastnoy Vodokanal LLC coveringall potential obligations.
Fitch considers Ventrelt's refinancing risk as acceptable due to its moderategearing and the implicit support from a number of Russian banks, including OJSCAlfa-Bank ('BBB-'/Stable), an entity under common control with the group, andstate-controlled banks that Fitch expects to participate in municipality-relatedfinancings. Ventrelt's RUB3bn bonds maturing in 2015 have a put option inNovember 2013. In its rating case, Fitch assumes that bonds will be put bybondholders in 2013 and that Ventrelt will be able to refinance the bonds.
In March, Ventrelt signed a 30-year concession agreement in the city ofVoronezh. While Fitch views the group changes as positive, Ventrelt needs todemonstrate that it can effectively manage the newly consolidated assets and canmaintain and improve its overall performance, profitability and working capitalmanagement.
Water and sewage tariffs in Russian cities are negotiated annually between awater utility and a local tariff regulator. Tariffs represent a cost-plusmechanism and cover operating expenditure (opex) and planned capex. The changesin concession legislation introduced in 2010 provide for long-term tariffs thatshould increase earnings visibility in the sector and improve the legal statusand protection of concessionaires. Fitch expects long-term water tariffs to beimplemented from 2014. On the other hand, Russian officials are committed to capannual utility tariff increases at below 15%, ie, in line with the annualindexation of domestic natural gas prices. Furthermore, from 2012, annualutility tariff increases take place on 1 July and 1 September instead of 1January, thus reducing revenue growth for all utility companies in Russia.
WHAT COULD TRIGGER A RATING ACTION
Positive: future developments that may, individually or collectively, lead to apositive rating action include:
- Increased revenue and earnings visibility following the implementation oflong-term tariffs could lead to a positive rating action.
- An acquisition-driven increase in Ventrelt's business without deterioration ofcredit metrics would be positive for the rating.
- Improved cash collection.
Negative: future developments that may, individually or collectively, lead to anegative rating action include:
- An increase in leverage above 4x net debt/connection-fee adjusted EBITDAand/or weakening of EBITDA-based interest cover below 3x to fund additionalcapital expenditure or acquisitions may lead to a negative rating action.
- A sustained reduction in cash generation through a worsening operatingperformance or deteriorating cash collection may lead to a negative ratingaction.
The rating actions are as follows: Ventrelt Holdings Ltd. Long-term foreign currency IDR: affirmed at 'BB-'; Stable Outlook Long-term local currency IDR: affirmed at 'BB-'; Stable Outlook National Long-term rating: affirmed at 'A+(rus)'; Stable Outlook RVK-Finance LLC (wholly-owned indirect subsidiary of Ventrelt Holdings Ltd) Senior unsecured rating: affirmed at 'BB-' Senior unsecured rating: affirmed at 'A+(rus)' ((Bangalore Ratings Team, Hotline:+91 80 4135 5898Jyothsna.BN@thomsonreuters.com,Group id: BangaloreRatings@thomsonreuters.com,Reuters Messaging:Jyothsna.BN.email@example.com))