Russian Railways plans RUB 5.7bn investment program.

By bne IntelliNews June 5, 2012
State-controlled railways monopoly Russian Railways (RZD) is planning a RUB 5.7tn (USD 167bn) investment program for 2012-2020, out of which RUB 3.8tn the company plans to finance itself (borrowing about RUB 400bn) and RUB 1.9tn to request from the state, Vedomosti reports citing RZD's VP Vadim Mikhailov. State financing for the investment program could take form of infrastructure bonds, concession schemes, and investment of the pension funds. However, previously government's representatives were skeptical regarding financing the investment program hinting that RZD could raise sufficient funds by itself. RZD's sources claim that should the government not finance the RUB 1.9tn, the company will have to cut investment in few major infrastructure projects. RZD in the coming 3-5 years plans to borrow RUB 60bn-RUB 80bn (USD 1.8bn - USD 2.4bn), PRIME reported this week citing a corporate finance rep of the company. This would include tapping the Eurobond market at least once a year, with the rest to be borrowed in RUB. RZD placed USD 1bn worth of 10-year Eurobonds yielding 5.7% annually in the end of March 2012. At the same time demand for the securities exceeded the amount proposed threefold. It is also noted that prior to the placement yield guidance was lowered from 5.875% to 5.75%, making it the lowest yield on 10-year Eurobonds from CIS issuers. Last week RZD placed 7-year RUB-denominated Eurobonds at 8.3%, demand almost twofold exceeding the amount proposed. This year the company is going to borrow about RUB 100bn, out of which 70% will account for RUB and 30% for foreign currencies. In May six issues of 10 to 20 years domestic bonds worth RUB 90bn were registered. IFRS net profit of RZD declined by 30% y/y to RUB 67bn in H1/11. Profit decline was attributed to finishing the package of anti-crisis measures initiated in 2009 that pushed up operational expenses by 20% to RUB 644bn. In H1/11 revenues increased by 9% y/y to RUB 691bn, mostly due to cargo turnover growth of 8%. Last month Fitch Ratings affirmed the foreign currency long-term Issuers Default Rating (IDR) and priority unsecured rating of RZD at BBB, outlook Stable. RZD's ratings are on the same level as Russian sovereign ratings (BBB/Stable) due to 100% state ownership and strategic role of the company, while reflecting strong ties with the state including yearly tariffs, capital investment and subsidies being approved by the government. At the same time Fitch believes that own business and financial indicators of the company comply with the BBB rating, it being held back, however, by short-term nature of tariff-setting, market risk on commodity cargo (coal, oil and iron ore), low geographic diversification and dependency on state financing in terms of subsidies and capital injections. Agency expects single-digit revenues growth in mid-term perspective, EBITDA of about 20%-25% and negative cash flow due to substantial capital investment program of about RUB 1.3tn in 2012-2014.

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