OREANDA-NEWS. Fitch Ratings has affirmed Globaltrans Investment PLC's (GLTR) Long-term foreign currency Issuer Default Rating (IDR) at 'BB'. The Outlook is Stable.

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. (BB+/Stable), 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-/Positive) 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.

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. At end-2013 GLTR reported flat funds from operations (FFO) adjusted net leverage at 1.9x. 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-2013. 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 73% of total freight rail turnover making 82% of net revenue from operation of rolling stock in 2013.

Customer Concentration, Short-term Contracts
GLTR's rating is constrained by customer concentration as its top four customers accounted for about 68% of net revenue from operation of rolling stock in 2013 and primarily 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 2008-2013. 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. We treated operating lease rentals as a debt-like obligation and applied a 5x multiple to capitalise the related costs as we 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 around 2x at end-2014 and to then improve. This leverage expectation and FFO fixed charge coverage of around 4.2x 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 30% of net revenue from operation of rolling stock in 2013.

Moderate 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 does not expect significant volume growth in the short to medium term given still depressed GDP growth, which we currently forecast to be within 1%-2% over 2014-2015. Consequently, we expect market freight rates to grow slowly below the inflation level in the short to medium term.

LIQIDITY AND DEBT STRUCTURE
Adequate Liquidity
Fitch views GLTR's liquidity at end-2013 as adequate, consisting of USD104m of cash and cash equivalents, USD192m of undrawn credit facilities and considering positive free cash flow in 2014 (after dividends and capex), compared with short-term maturities of USD277m at end-2013. Although the group does not have a centralised treasury, we believe 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-2013 amounted to USD1,014m and comprise mainly bank loans (USD596m or 59%), bonds (USD352m or 35%) and finance leases (USD45m or 4%), the latter are common for the sector. At end-2013 all outstanding bank debt (USD596m) 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 2.0x 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.