OREANDA-NEWS. Fitch Ratings has affirmed transportation company Globaltrans Investment Plc's (GLTR) Long-term foreign currency Issuer Default Rating (IDR) at 'BB' with a Stable Outlook.

We have also withdrawn Joint Stock Company New Forwarding Company's (GLTR's operating subsidiary) senior unsecured 'BB(EXP)' and national senior unsecured 'AA-(rus)(EXP)' as the company has chosen not to proceed with the bond issue. A full list of rating actions is attached at the end of this commentary.

The ratings reflect GLTR's solid business and financial profile and its strong market position as well as its cyclical exposure and small scale. The company is one of the leading rolling stock operators in a highly fragmented rail transportation market responsible for about 8% of total freight rail volumes in Russia at end-1H15. The ratings also benefit from GLTR's competitive position compared with its rated peers as it owns a relatively young rail fleet and focuses on transportation of higher-priced cargoes.

However, GLTR's business is exposed to cyclical commodity industries and pricing pressure on the market. The ratings are constrained by its small size relative to rated peers (i.e. JSC Freight One (BB+/Negative)) and concentrated customer base, although the latter somewhat mitigated by its medium-to-long-term contracts with major clients.

KEY RATING DRIVERS
Weak Market Fundamentals
The contracting Russian economy continued to pressure freight rail transportation market, affecting volumes and rates. We expect rail transportation volumes to remain weak in 2016, driven by a forecast 1% decline of Russian GDP, increasing competition from other means of transport, especially for crude oil during the period of low oil prices as well as challenging global market conditions for metallurgical cargoes. These may affect GLTR transportation volumes as the company is largely exposed to cyclical commodity industries. Expected high single-digit inflation in 2016 will put further pressure on GLTR's margins.

Pressure on Rail Operators' Rates
Weak market fundamentals in Russia, coupled with redundant rail fleets, continued to pressure on freight rail operators' rates. The ban on use of old railcars with expired useful life from 2016 should prompt gradual disposal of railcars and help reduce the oversupply of railcars on the market, boosting rail operators' tariffs. However, time will be needed for sufficient amount of railcars to be scrapped. In our base rating case we expect freight rail operators' tariffs to remain largely flat in 2016, with a moderate recovery starting from 2017.

Weaker Margins but FCF Positive
GLTR's financial profile is supported by a healthy adjusted EBITDA margin, although it has slightly deteriorated to 39.3% in 1H15 from 43.7% in 1H14. We expect EBITDA margin to remain under pressure in the short- to medium-term due to overall weakening demand for rail transportation in view of the stagnating economy, inflationary pressure and faster growth of JSC Russian Railway's (BBB-/Negative) tariffs over those of rail operators.

However, despite the macro headwinds we expect GLTR to continue generating strong cash flow from operations in the medium term. This, together with moderate capex and dividends expectations, will result in continued positive free cash flow (FCF). This would contribute to further deleveraging or financial flexibility for potential M&A deals (not expected in the near term).

Moderate Capex, No M&A Drive Deleveraging
We estimate GLTR's funds flow from operations (FFO) adjusted net leverage to have improved to slightly below 2x at end-2015 from 2.2x at end-2014, as a result of low investment spending and zero dividends payments for 2014. We continue to adjust leverage metrics for railcar operating lease using 5x multiple as we expect GLTR to continue to rent rolling stock (around 8% of total operated fleet) in the medium term. We forecast GLTR's leverage and coverage metrics to gradually improve further over 2016-2019 on the back of lower capex, moderate dividend payments and absence of large debt-financed M&A deals. This leverage and coverage expectations support the ratings.

Limited FX and Rate Risk
GLTR is not exposed to FX fluctuations as only a negligible share of operating expenses and debt is denominated in foreign currencies. Its interest rate exposure is also limited as only 10% of total outstanding debt at end-1H15 was raised under floating interest rates. GLTR also holds part of its cash in foreign currencies.

Customer Concentration
GLTR's ratings are constrained by customer concentration as its top five customers accounted for 75% of net revenue from operation of rolling stock in 1H15. This risk is partially mitigated by the long-term nature of service contracts with the top three customers, which accounted for 63% of revenue in 1H15, and the counterparties' strong market positions. GLTR has recently extended its service contract with Rosneft for another five years. GLTR intends to diversify its customer base by increasing the number of mid- and small size clients. Further expansion of longer-term agreements with customers will increase the company's cash flow visibility.

Second Largest Private Operator
GLTR is one of the largest private freight rail transportation groups in Russia by transported volumes by rail (estimated 8% of the market) and by operated fleet (estimated 5% of the market). GLTR's competitiveness benefits from a modern railcar fleet relative to Russian peers, with an average age of 9.1 years at end-1H15. Therefore maintenance and fleet renewal costs are a smaller burden on its cash flow.

The company's ratings also benefit from the dominance of higher-priced cargo transportation, including oil products and metallurgical cargoes, which accounted for 75% of total freight rail turnover and 85% of net revenue from operation of rolling stock in 1H15. Increase of market share in terms of fleet numbers and revenue allowing for greater efficiency and customer diversification, without significant deterioration of credit metrics would be positive for the ratings.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for GLTR include:
- Domestic GDP declines of 3.7% and 1% in 2015-2016 and 1.5% growth over 2017-2019
- Inflation 12.9% in 2015 and 5.5%-9% over 2016-2019
- Freight transportation rates to grow below inflation
- Capex moderately growing above maintenance levels starting from 2016
- Zero dividends in 2015 for 2014 and payout ratio in line with historical average thereafter

RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action 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 1.25x and FFO fixed charge coverage of above 4.5x.
- Sustained stronger economic growth and infrastructure improvements and/or a substantial increase in GLTR's market share in terms of fleet numbers and consequently transported volumes and revenue, allowing greater efficiency.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- A sustained rise in FFO lease-adjusted net leverage above 2.5x and FFO fixed charge coverage of below 3x, which would have rating implications, due to GLTR's complex corporate structure, and lead to a rating review.
- Sustained slowdown of the Russian economy leading to material deterioration of the group's credit metrics.
- Unfavourable changes in Russian legislative framework for the railway transportation industry, which continues to be under reform.

LIQUIDITY
We assess GLTR liquidity position as manageable. At end-1H15 GLTR's cash and cash equivalents stood at RUB4bn, together with unused credit facilities of RUB4bn, mainly from Russian subsidiaries of European banks and expected positive FCF (after capex and dividends), are sufficient to cover short-term maturities of RUB8.9bn.

GLTR does not pay commitment fees for the majority of unused credit facilities, which is common practice for Russian corporates. Although the group does not have a centralised treasury entity, Fitch believes that it can manage liquidity in an efficient and expeditious manner, mainly with dividends from its subsidiaries.

GLTR's outstanding debt of RUB24bn at end-1H15 was primarily raised in roubles from Russian and foreign banks at the operating companies' level. Almost all of the bank debt is secured by a pledge on the company's railcars.

FULL LIST OF RATING ACTIONS

Globaltrans Investment Plc
Long-term foreign and local currency IDRs: affirmed at 'BB'; Outlook Stable
Short-term foreign and local currency IDRs: affirmed at 'B'
National Long-term rating: affirmed at 'AA-(rus)'; Outlook Stable

Joint Stock Company New Forwarding Company
Senior unsecured 'BB(EXP)' withdrawn
National senior unsecured 'AA-(rus)(EXP)' withdrawn