Baku, Azerbaijan, Sept.10
Weakening market fundamentals combined with further ruble devaluation could put pressure on the ratings of Russian railcar operators, Fitch Ratings says.
Russian freight volumes fell one percent in the first half of 2014, as construction-related transportation dropped on the back of a slowdown in the construction industry. Lower volumes exacerbated oversupply in the rail fleet, putting further pressure on average daily rates, according to the authors of the report.
The weakening market conditions hit Far-Eastern Shipping Company (FESCO, B/Stable) hardest, leading to a 54 percent drop in EBITDA at its rail arm on a dollar basis, or 48 percent in rubles. Globaltrans Investment (BB/Stable) and OJSC Transcontainer (BB+/Stable) also reported double-digit EBITDA declines, although on a smaller scale.
"We do not expect any material improvement in the first half of 2014 financial performance. Rail fleet rates are likely to remain under pressure as weak economic growth translates into low volumes and overcapacity remains high. We cut our 2014 GDP growth forecast for Russia to 0.5 percent from 1.2 percent in June, mainly due to the impact of the U.S. and EU sanctions and ruble depreciation," the report said.
"If earnings continue to fall in H2 and the ruble depreciates further, credit metrics for some issuers could approach the weak end of the range generally considered suitable for their current ratings."
Given the expectation of lower rail volume growth and continued pressure on tariffs, at least in the short-to-medium term, the ability of companies to rationalize their cost base will be a critical factor in supporting margins and current FFO levels.
The recent 13 percent fall in the ruble has also negatively affected rated Russian transportation companies that have a significant share of debt denominated in foreign currencies. This is due to the currency mismatch between their debt and revenue as well as limited hedging mechanisms used to reduced their exchange rate exposure.
"We believe FESCO has the highest exposure to foreign currency risks, as about 76 percent of its debt at end H1 was denominated in foreign currencies, mainly in dollars and only 50 percent of revenue was in dollars or dollar-linked,:" Fitch said.
"GLTR and Transcontainer have little or no foreign-currency debt. The adverse impact of the ruble devaluation could be exacerbated by a potential increase in interest rates in the domestic debt markets and inflationary pressures. These risks could increase if further sanctions are imposed against Russia over the crisis in Ukraine."
The expected increase of JSC Russian Railways' (RZD, BBB/Negative) tariffs in 2015 could hurt transport companies' margins by increasing empty-run costs per km.
"We do not expect RZD's metrics to improve in 2014 as part of its debt is denominated in foreign currencies and the majority of its tariffs were frozen in 2014, although it benefits from an increase in average distance traveled. The recent approval of regulations on mandatory modernization and certification for extending rail fleet useful life might also negatively affect rail operators with older fleets like UCL Rail/Freight One (BB+/Stable) and OJSC Federal Freight (not rated), as it may make useful life extension costly," the report said.
"It will have less impact on GLTR and FESCO due to their younger rail fleets. The regulation could have an overall positive effect in the medium term by encouraging the gradual disposal of old rail fleet, helping reduce overcapacity that could potentially result in the recovery of rail fleet rates," Fitch said.
Edited by CN