Moody's assigns provisional rating to proposed issue of Eurobonds by Eastcomtrans (Kazakhstan); outlook – Stable

04.04.13, 10:40
/Moody's Investors Service, London, April 3, 13, heading by KASE/ – Moody's Investors Service has today assigned a provisional rating of (P)B3, with a loss given default (LGD) assessment of LGD3/46%, and a stable outlook to the proposed issuance of notes by Eastcomtrans LLP. The company will pledge its railcars as collateral against the notes. Eastcomtrans will use the proceeds from the notes placement to refinance part of its existing debt and finance the expansion of its fleet. RATINGS RATIONALE The (P)B3 rating assigned to the proposed notes is equivalent to Eastcomtrans's corporate family rating (CFR), reflecting Moody's expectation that the notes will hold security over specific assets, which is the case for the company's other secured and unsubordinated financial debt. Therefore, Moody's assumes that the notes will not be subordinated to other secured debt which currently represents a predominant portion of the company's total debt. Eastcomtrans's B3 CFR primarily reflects the company's (1) small size, reflected by revenue of $151 million for 2012 (under audited IFRS financial statements), which is modest on a global scale; (2) high industry concentration and, most importantly, customer concentration, with the company's largest customer, Tengizchevroil LLP, representing 65% of its total revenue for 2012, which renders Eastcomtrans's business dependent on its continuing relationships with a single customer; (3) highly concentrated ownership, which creates the risk of rapid changes in the company's strategy and development plans, along with the risk of both a revision of its conservative financial policy and an increase in shareholder distributions (although this risk is mitigated by the acquisition of a 6.67% stake in Eastcomtrans by International Finance Corporation (IFC; Aaa stable), completed in March 2013, and related improvements in corporate governance); (4) the potential evolution of Eastcomtrans's business profile – as the company aims to increase the proportion of railcars in its own operation as opposed to operating leasing of railcars to other operators and cargo owners which is currently its main business – and uncertainty regarding its future operating and financial performance under its target business model; and (5) the company's overall exposure to an emerging market operating environment with a less developed regulatory, political and legal framework. However, more positively, the Eastcomtrans's rating also factors in (1) its solid share of around 9% of the Kazakhstan freight rail transportation market in terms of railcar fleet; (2) its modern railcar fleet, the average age of which is four years (compared with the industry average of 17 years) which confers economies in terms of repair costs; (3) the company's long-term relationships and lease contracts until the end of 2015 with its key customer, Tengizchevroil (although there is no penalty for pre-term termination of contracts); (4) its high operating efficiency, reflected by an EBITA margin of above 55% (as adjusted by Moody's); (5) its sustainable projected financial metrics, with Moody's expecting the company to maintain leverage – measured by debt/EBITDA 2 below 4.0x, EBIT/interest above 2.0x and retained cash flow (RCF)/net debt above 20% (all metrics are as adjusted by Moody's); (6) its adequate liquidity and manageable foreign currency risk, as most of the company's contracts with customers are linked to the US dollar; and (7) the high market value of its own railcar fleet (i.e., excluding the fleet leased in under financial leasing), at around $530 million, which comfortably covers the company's debt, which amounts to $324 million (excluding financial leasing) as of year-end 2012. The stable outlook on Eastcomtrans's ratings reflects Moody's expectation that (1) the company's leverage will remain below 4.0x debt/EBITDA, its EBIT/interest above 2.0x, and its RCF/net debt above 20% on a sustainable basis (all metrics are as adjusted by Moody's); (2) the company will maintain adequate liquidity; and (3) it will be able to maintain high fleet utilisation rates, with the bulk of its fleet under contract at all times. WHAT COULD CHANGE THE RATING UP/DOWN Moody's could consider Eastcomtrans's ratings for an upgrade if the company (1) materially improves its customer diversification; (2) maintains adequate liquidity; and (3) continues to demonstrate a strong operating performance. Conversely, negative pressure could be exerted on the ratings if there is a material deterioration in Eastcomtrans's leverage or interest coverage metrics, or in the company's liquidity or market position. The ratings could also come under negative pressure if any of Eastcomtrans's contracts with Tengizchevroil is terminated without Eastcomtrans being able to promptly remarket the released railcars. Eastcomtrans LLP's ratings were assigned by evaluating factors that Moody's considers relevant to the credit profile of the issuer, such as the company's (i) business risk and competitive position compared with others within the industry; (ii) capital structure and financial risk; (iii) projected performance over the near to intermediate term; and (iv) management's track record and tolerance for risk. Moody's compared these attributes against other issuers both within and outside Eastcomtrans LLP's core industry and believes Eastcomtrans LLP's ratings are comparable to those of other issuers with similar credit risk. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on for a copy of this methodology. Eastcomtrans is the largest private company specialising in operating leasing of freight railcars in Kazakhstan. As of year-end 2012, its fleet comprised 9,782 railcars, which represented around 9% of the country's total. In 2012, the company derived 81% of its $151 million of revenues from leasing out its railcars under operating lease agreements, and 19% from providing transportation and other related services. 93.33% in Eastcomtrans's share capital is controlled by Mr. Marat Sarsenov and 6.67% by IFC. [2013-04-04]