Fitch Affirms Globaltrans at 'BB'; Outlook Stable

Fitch Ratings has affirmed Globaltrans Investment Plc's (GLTR) Long-term foreign currency Issuer Default Rating (IDR) at 'BB' with a Stable Outlook. A full list of rating actions is at the end of this release.

GLTR's ratings reflect its solid business and financial profile but also consider its exposure to cyclical commodity industries. GLTR is smaller than UCL Rail B.V. but has a younger fleet, and its customer base is more concentrated, with a focus on higher margin cargoes.

KEY RATING DRIVERS

One of the Largest Private Operators

GLTR is one of the largest private freight rail transportation groups in Russia with a market share of about 8.3% of total freight volume transported by rail in Russia during 2013. In 2012-2013 GLTR acquired captive rail freight operators of JSC Holding Company Metalloinvest (Metalloinvest; BB/Stable) and OJSC Magnitogorsk Iron & Steel Works (MMK; 'BB+/Negative) with about 12 thousand units of rolling stock in total, which were deployed mainly with these two existing customers.

Limited Leverage Headroom

GLTR's funds flow from operations (FFO) adjusted net leverage reached 2.1x in 2012-2013 and Fitch Ratings expects it to remain slightly above 2x in 2014, but to fall below this level in future due to low capex expectation. Failure to keep leverage ratios below 2.25x may put pressure on the rating.

Cash Generative Profile

The company's financial profile is supported by a healthy adjusted EBITDA margin of about 45% on average during 2008-2013, adjusted for pass-through costs. Fitch expects GLTR to report strong cash flows from operation (CFO) over the medium term and free cash flow is expected to remain positive over the same period due to low capex expectations.

Modern Fleet, Higher-Priced Cargo Dominate

GLTR's ratings benefit from its competitive position compared with its Russian peers as it owns a relatively modern railcar fleet with an average age of about eight years at end-1H14. As a result, GLTR's maintenance and fleet renewal costs are a smaller burden on cash flow. The company's ratings also benefit from the dominance of higher-priced cargo transportation, including oil products and oil and metallurgical cargoes, which accounted for 76% of total freight rail turnover making 84% of net revenue from operation of rolling stock in 1H14.

Customer Concentration, Short-term Contracts

GLTR's rating is constrained by customer concentration as its top four customers accounted for about 72% of net revenue from operation of rolling stock in 1H14 as well as sizable portion of one-year-term transportation agreements under which the company operates. Although customer concentration is higher compared with rated peers, it is mitigated by the counterparties' market positions and credit profiles as well as prepayment terms under the majority of transportation agreements in common with its peers.

Fitch notes that in order to increase its cash flow visibility, GLTR entered into a three year service contract with Metalloinvest in May 2012 (that has been extended for additional 19 months in January 2014) and a five year service contract with MMK in February 2013, which secure a significant portion of GLTR's non-oil fleet. In addition, GLTR intends to diversify its customer base by increasing the number of mid- and small size clients. Possible introduction of longer-term agreements with other large customers may further increase the company's cash flow visibility.

Lease-Adjusted Ratios

GLTR's leased-in rail fleet fluctuated between 6%-25% of total owned and leased-in rail fleet in 2008-1H14. Fitch expects the share of leased-in rail fleet to be around 4%-5% of total owned and leased in rail fleet over the medium term. Fitch treated operating lease rentals as a debt-like obligation and applied a 5x multiple to capitalise the related costs as Fitch expect that part of the operating lease agreements will be maintained over the long term. Fitch expects GLTR's FFO adjusted net leverage to remain at slightly above 2x at end-2014 and to then improve. This leverage expectation and FFO fixed charge coverage of around 3.6x on average support the ratings.

Elevated Volume Risks

Similarly to its peers, GLTR's strengths are partially offset by the company's exposure to cyclical commodity industries. Fitch assesses GLTR's volume risk as elevated, although this is mitigated by a comparatively low share of fixed costs in the company's cost structure and signed medium- to long term contracts with Metalloinvest and MMK that were responsible for about 31% of net revenue from operation of rolling stock in 1H14. Additionally, in 2014 GLTR extended service contract with Rosneft until March 2016 that accounts for about 31% of net revenue from operation of rolling stock in 1H14.

Weaker Market Expectations

In Russia, railroads remain the main method of cargo transportation, accountable for as much as 85% of total freight turnover (excluding pipelines). The growth of rail freight turnover has been on average 1% below that of real GDP since 2002. Fitch expects weaker volume growth in the medium term given slower GDP growth of 0.3%-1.6% over 2014-2016. Thus, Fitch expects market freight rates to grow slowly and below the rate of inflation.

LIQIDITY AND DEBT STRUCTURE

Adequate Liquidity

Fitch views GLTR's liquidity at end-1H14 as adequate, consisting of USD124m of cash and cash equivalents, undrawn facilities of USD195m, several recently concluded committed rouble denominated facilities and considering positive free cash flow in 2014 (after dividends and capex), compared with short-term maturities of USD573m at end-1H14. Although the group does not have a centralised treasury, Fitch believes that it can manage liquidity in an efficient and expeditious manner mainly with dividends from its subsidiaries.

Secured Bank Debt

GLTR's outstanding debt at end-1H14 amounted to USD1bn and comprise mainly bank loans (USD639m or 64%), bonds (USD334m or 33%) and finance leases (USD27m or 3%), the latter are common for the sector. At end-1H14 almost all of outstanding bank debt was secured by a pledge of rail fleet.

RATING SENSITIVITIES

Positive: Future developments that could lead to positive rating actions include:

- Diversification of the customer base and lengthening of contract duration with volume visibility with key customers.

- A sustained decrease in FFO lease-adjusted net leverage below 1.0x and FFO fixed charge coverage of above 5.0x.

- Sustained stronger economic growth and infrastructure improvements and/or a substantial increase in GLTR's market share in terms of fleet number and therefore transported volumes and revenue generated allowing greater efficiency.

Negative: Future developments that could lead to negative rating action include:

- A sustained rise in FFO lease-adjusted net leverage above 2.25x would be negative for the ratings, and may lead to further review and ratings implications due to complex corporate structure.

- Sustained slowdown of the Russian economy leading to a material deterioration of the group's credit metrics.

- Unfavourable changes in Russian legislative framework for the railway transportation industry, which continues to be reformed.

Fitch has affirmed the following ratings:

Long-term foreign currency IDR at 'BB'; Outlook Stable

Long-term local currency IDR at 'BB' Outlook Stable

Short-term foreign currency IDR at 'B'

Short-term local currency IDR at 'B'

National Long-term rating at 'AA-(rus)'; Outlook Stable

Additional information is available on www.fitchratings.com

Applicable criteria, 'Corporate Rating Methodology', dated 28 May 2014, are available at www.fitchratings.com.

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=931075

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