Fitch Affirms Georgian Railways at 'BB-'

Azerbaijan, Baku, June 22 / Trend / Fitch Ratings has affirmed Georgian Railway JSC's (GR) Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BB-', Fitch said on Friday. Fitch has also affirmed GR's foreign and local currency senior unsecured ratings at 'BB-' and GR's $250 mln notes due 2015 at 'BB-'. The RR4 rating on the notes has been withdrawn. The Short-term foreign and local currency IDRs have been affirmed at 'B'. The Rating Outlook on the Long-term IDRs is Stable. Additionally, Fitch has assigned GR's proposed notes an expected senior unsecured rating of 'BB-(exp)'. The proposed notes will rank equally with the existing notes. The final rating is contingent upon the receipt of final documentation conforming materially to information already received. Fitch understands that GR intends to use the proceeds of the proposed notes for a tender offer for the existing notes, to provide funding for its capex and to pay dividends in respect of retained earnings. While Fitch views the planned extension of debt maturity profile, possible lowering of cost of debt and increase of liquidity as credit positives, the intended special dividend payment is viewed as a sign of a more aggressive and opportunistic financial policy, especially considering the recently extinguished dividend moratorium and intended (but unsuccessful) IPO. This is despite the strong operational and financial performance of GR which together with the proposed notes provide for adequate funding of the company's sizeable capex (exceeding 800 mln lari including capitalised interest during 2012-2014). The proposed notes will benefit from covenants including a change of control clause (a loss of control of 50 percent or more by the government would be a put event - as for the existing notes), incurrence leverage test of maximum net debt to EBITDA of 3.5 times (x), restriction on dividends payment at 50 percent of net profit and a negative pledge. The ratings affirmation is supported by GR's standalone profile which Fitch considers as commensurate with a low 'BB' rating level 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 in Georgia. The ratings were previously aligned with the sovereign ratings of Georgia ('BB-'/Stable), in accordance with Fitch's parent / subsidiary linkage methodology, reflecting the 100 percent direct and indirect state ownership, the government backing for its two key investment projects, its importance to the local economy as the largest taxpayer and employer, and its strategic importance as the regional transit corridor. However, Fitch believes that the transfer of a 25.5-percent stake in GR from the government to a recently created JSC Partnership Fund ('BB-'/Stable), fully government owned, and especially the intended special dividend have weakened GR's links with the state. "Specifically, the government's tangible support of GR has decreased during a high capex period," Fitch's statement said. The special dividend effectively pre-pays GR's dividends to the government in lieu of GR's land sale proceeds from the government when Fitch has previously expected a cash payment to be used to amortise debt. Fitch is therefore likely to separate GR's ratings from the sovereign ratings in case of a sovereign rating upgrade. A negative sovereign rating action would be replicated for GR. A weakening of GR's standalone profile, for example gross lease adjusted debt to funds from operations (FFO leverage) above 3.5x, would also be negative for the ratings. "While sustained FFO leverage below 1.0x would be positive for the standalone profile, any rating improvement would be capped by the sovereign ratings," Fitch experts believe. Despite its high EBITDA margin, the company remains highly free cash flow (FCF) negative due to large capex plans (the company treats its two large capex projects as discretionary). Fitch anticipates net lease adjusted debt to EBITDAR to average around 2.3x during 2012-2014. This assumes that dividends of up to 50 percent of net income are paid in 2013 and 2014 and the special dividend is paid in 2012 on top of the 28 mln lari dividend already paid. FFO leverage is expected at be around 2.9x and FFO interest coverage around 4.4x. As of 31 May 2012, GR's liquidity remained adequate with 61.7 mln lari of cash and 40.3 mln lari of unused facilities (due in 2015 and 2017) with no short-term debt. Fitch forecasts FCF-to-revenue to be negative at around 40 percent in 2012, assuming the bond issue goes ahead and the company pays the special dividend. The proposed bond would increase liquidity by around 200 mln lari, Fitch believes.