TEXT-Fitch rates Russian Railways' notes 'BBB'

Oct 9 - Fitch Ratings has assigned RZD Capital Limited's 8.30% RUB loan participation notes (LPNs) due 2019 and 5.70% USD LPNs due 2022 senior unsecured 'BBB' ratings. The new LPNs (further notes) are to be consolidated and form a single series with the outstanding RUB25bn 8.30% LPNs due 2019 and USD1bn 5.70% LPNs due 2022 respectively.

The notes will be issued on a limited recourse basis for the sole purpose of funding loans by RZD Capital Limited to JSC Russian Railways (RZD). The proceeds of the loans will be used by the company in the ordinary course of its business. The noteholders will rely solely on RZD's credit and financial standing for the payment of obligations under the LPNs.

RZD's ratings are as follows: Long-term foreign currency IDR: 'BBB'; Stable Outlook Long-term local currency IDR: 'BBB'; Stable Outlook Foreign currency senior unsecured rating: 'BBB' Local currency senior unsecured rating: 'BBB' Short-term foreign currency IDR: 'F3' Short-term local currency IDR: 'F3' National Long-term rating: 'AAA(rus)'; Stable Outlook National senior unsecured rating: 'AAA(rus)'

RZD's ratings are aligned with those of the Russian Federation ('BBB'/Stable), its sole shareholder and reflect their strategic, operational and financial links. These links include annual tariff indexation and capex approval by the federal government, provision of federal subsidies for passenger and freight transport, direct equity injections to fund RZD's capex, and state-owned bank financing. Fitch does not expect a partial privatisation of RZD to take place until 2013.

Fitch assesses RZD's standalone creditworthiness in the mid-'BBB' category. This is driven by RZD's position as the monopoly owner/operator of the Russian rail infrastructure essential for moving freight and passengers across Russia and abroad. RZD's standalone profile is limited by the absence of long-term tariffs, its exposure to commodities market risks, lack of geographical diversification and dependence on monetary state support.

RZD's freight turnover in 8M12 reached 1.47trn tonne-km, up 5.2% yoy, or 1.85trn tonne-km including empty runs, up 3.9%. Over this period, RZD transported 846.8m tonnes of cargo, a 3.4% yoy increase. In H112, RZD reported unconsolidated revenue of RUB677bn under Russian accounting standards, up 5% yoy, and income before taxation of RUB60bn, down 19% yoy. RZD's profit margin reduction in 2011-2012 follows the phasing out of certain cost control measures implemented in 2009.

RZD's gross leverage was 1.2x EBITDA in 2011, up from 0.8x in 2010, while its net leverage remained at 0.6x EBITDA thanks to a large cash position at end-2011 from asset disposals. Fitch expects RZD's massive RUB1.35trn consolidated capex programme in 2012-2014 to be partially debt funded. Therefore, the agency forecasts RZD's net debt/EBITDA leverage at 2.2x by end-2014, which is higher than RZD's forecast of 1.4x.

At 31 August 2012, RZD's standalone gross debt totalled RUB354bn. Its standalone liquidity consisted of RUB39bn in cash and short-term deposits, plus RUB270bn of undrawn approved but uncommitted credit facilities, mainly from state-owned Sberbank of Russia ('BBB'/Stable). This comfortably covers RZD's short-term debt maturities of RUB39bn in the remainder of 2012. Fitch forecasts that in 2012-2014 RZD will need to raise about RUB180bn in new debt to mostly finance its capital investment projects.

Fitch notes that RZD's partial privatisation - 25% less one share - announced by the government earlier this year and earmarked for 2012-2013 is unlikely to change RZD's current ratings. Nonetheless, the agency notes that following the partial privatisation the company may experience difficulties with funding its capex programme if state subsidies decrease, and unless some of the privatisation proceeds remain with RZD.

WHAT COULD TRIGGER A RATING ACTION? Positive: Future developments that may, individually or collectively, lead to positive rating action include: - Economic growth leading to freight volume growth that exceeds Fitch's expectations would be positive for RZD's ratings. But at the current 'BBB' level, an upgrade of Russia's sovereign rating would be a prerequisite for an upgrade of RZD's IDR.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

- Sustained leverage above 2.5x would put pressure on RZD's ratings. Fitch expects to continue aligning RZD's IDR with Russia's at the 'BBB' level, given the strength of state linkage. Fitch is unlikely to downgrade RZD before downgrading Russia first.

For further information on RZD, see Fitch's full rating report on RZD dated 7 March 2012 at


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The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable criteria, 'Corporate Rating Methodology', dated 8 August 2012, is available at ww.fitchratings.com.

Applicable Criteria and Related Research: Corporate Rating Methodology (New York Ratings Team)

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