Fitch Affirms Georgian Railway at 'B+', Outlook Positive
Azerbaijan, Baku, June 25 / Trend /
Fitch Ratings has affirmed Georgian Railway LLC's (GR) Long-term foreign and local currency Issuer Default Ratings (IDR) at 'B+' and Short-term foreign and local currency IDRs at 'B'. The Outlooks on the Long-term IDRs are Positive. Fitch has also affirmed the company's foreign and local currency senior unsecured ratings at 'B+', and Recovery Ratings at 'RR4', Fitch Ratings's report says.
"GR's ratings are aligned with the sovereign ratings of Georgia ('B+'/Positive/'B'), reflecting the 100% state ownership and importance to the local economy, its strategic importance as the regional transit corridor, and government backing for its two key investment projects. This backing is evidenced by a dividend moratorium, future assistance with land disposals and refundable VAT. The Georgian government no longer guarantees any of GR's debt, however, bondholders have a change of control (government ownership of less than 50%) put option. Due to the ratings alignment, any sovereign rating change for Georgia would be replicated for GR," the report says.
GR's credit profile is supported by its monopoly status, its liberal tariff-setting, which underpins healthy transit cargo profit margins, and the integrated nature of its business. Weaknesses for GR include the company's small scale of operations and revenues compared to other Fitch-rated peer railway operators. Additional challenging factors include the geopolitical risks and exposure to a single transit route.
"Fitch considers Georgian Railway's standalone business and financial profile as commensurate with a low 'BB' rating category based on the expectation that it will maintain its monopoly status and liberal tariff setting policy, along with a dominant market share in the provision of freight transportation services," says Apostolos Bantis, Associate Director in Fitch's Corporates team in London.
Fitch expects that continued moderate growth in transportation volumes and tariff increases will support GR's financial profile while the completion of the two investment projects will result in operating cost savings and improve the quality of service. In addition, major international investments in Black Sea ports will support a constant flow of transit cargo volumes passing through the Georgian corridor.
Revenues and EBITDA in 2010 reached historical highs, aided by an increase in freight volumes and a favourable FX impact (appreciation of CHF) which resulted in a high EBITDA margin of 51%. Despite strong cash flow from operations (CFO), the material increase in capex resulted in negative free cash flow (FCF). Fitch expects FCF to remain negative throughout the heavy capex period until 2014.
Fitch notes that GR's gross leverage (measured as total debt to EBITDA), of 2.3x at financial year-end 2010 (FYE10), has increased significantly compared to FYE09 (0.2x), following the USD250m bond issuance in July 2010 to fund its infrastructure and modernisation projects. These higher leverage levels compare well with the regional peer group and remain comfortable for the current ratings. Fitch expects GR's gross leverage metric to remain within the 2.0x-2.5x range over the medium term.
GR's liquidity is adequately supported by available credit lines from domestic banks and the European Bank for Reconstruction and Development (EBRD). The successful issuance of an inaugural USD250m Eurobond due 2015, along with a CHF146m loan from EBRD (which remains undrawn) secured funding for the disbursement of its two key capex projects. In addition, the company will not pay any dividends during the construction phase of the Tbilisi Bypass infrastructure project (end of 2013). Fitch views GR's exposure to FX risk as moderate.