Fitch Ratings-London/Moscow-27 March 2013: Fitch Ratings has assigned JSC Aeroflot's ('BB-'/Stable) proposed RUB5bn notes an expected local currency senior unsecured rating of 'BB-(EXP)' and an expected National senior unsecured rating of 'A+(rus)(EXP)'. A full list of Aeroflot's ratings is below.
KEY RATING DRIVERS
In accordance with Fitch's Parent and Subsidiary Rating Linkage methodology, Aeroflot's Long-term IDR continues to benefit from parental support via a one-notch uplift to its standalone profile assessed by Fitch at 'B+'. The agency views the strategic and operational ties between the parent (Russian Federation; 'BBB'/Stable) and the company as relatively strong. This is supported, among other things, by its majority state ownership (51.2% direct stake in addition to a 9.5% indirect stake), import duty exemptions for the purchase of certain types of aircraft and the company's importance in the development of the country's air transportation sector.
At the same time, Fitch acknowledges the potential negative implications of state links, for example, a potential aggressive consolidation and/or acquisition plans at the expense of Aeroflot's credit profile, but highlights that the Rostechnologii transaction, whilst proposed by the state, was to some extent at Aeroflot's discretion and following due diligence process.
- Downgrade Reflects High Leverage
The downgrade on 21 March 2013 reflected Fitch's view that Aeroflot's standalone credit metrics are no longer commensurate with the 'BB' rating category. Although Fitch forecasts improvement in the company's financial profile over 2013-2016, its leverage metrics remain high compared with its 'BB' rated peers.
Fitch forecasts Aeroflot's FFO adjusted leverage to have decreased to below 6x in 2012 and expects gradual de-leveraging to below 5x by 2016, despite the company's ambitious fleet expansion and renewal programme. While we acknowledge the benefits of a newer, more efficient fleet, the funding of the capex programme will require additional debt burden putting pressure on the company's financials. The agency anticipates FFO fixed charge cover to increase to around 2x over the forecast period. Based on these financial ratios, the company is well placed compared with its 'B' rated airline peers.
-Solid Profitability Expected
Despite some erosion of its profitability in 2011-2012 due to high fuel prices and consolidation of the financially weaker Rostechnologii assets, we expect Aeroflot's profitability to remain solid compared with its European and some US counterparts. While yield and passenger revenue per available seat-kilometre (PRASK) are largely in line with those of its rivals, the company's cost ratios (eg cost per available seat-kilometre (CASK)) put it at an advantage to other airlines providing a good foundation for maintaining sound margins.
-Solid Business Profile
Fitch views Aeroflot's standalone business profile as commensurate with the 'BB' rating category. It is supported by its dominant position as Russia's national flag carrier in a highly fragmented market (37% of the Russian passenger traffic in 2012), relatively diversified route network, strong position at the Sheremetjevo airport hub and ability to capitalise on the strong growth potential of the domestic market. While the yields on the domestic routes fall short of those on the European destinations, Fitch anticipates their increase in the medium term.
Fitch expects Aeroflot to continue dynamic growth given forecast Russian GDP growth, increased mobility of Russian citizens and the integration of the Rostechnologii airline stakes. The consolidation of these assets has enabled Aeroflot to strengthen its dominant position in Russia's airline sector and extend its network and should underpin the implementation of the company's multi-brand strategy in the medium term.
LIQUIDITY & DEBT STRUCTURE
Fitch views Aeroflot's liquidity position as satisfactory, with cash of USD597m at end-9M12 and committed credit lines of about USD500m (Aeroflot standalone) at end-2012 sufficient to cover its short-term obligations. As at end-9M12, short-term debt stood at USD784.6m (including USD263.8m of finance leases). This included bonds totalling c.USD400m due in April 2013. The company has registered an issue of RUB-denominated bonds for about RUB5bn (around USD167m), the proceeds of which are likely to be used for refinancing purposes. Fitch expects the company to generate negative free cash flow (after finance lease payments) over 2012-2014.
Positive: Future developments that could lead to positive rating actions include:
- Evidence of stronger state support.
- Improvement of the financial profile (eg FFO adjusted leverage trending towards 4.0x and FFO fixed charge cover above 2.0x on a sustained basis) due to, among other things, material increase in profitability, moderation of investments in the fleet and/or drop in fuel prices.
Negative: Future developments that could lead to negative rating action include:
- Further material deterioration of the credit metrics due to, among other things, acquisitions, ambitious fleet expansion and/or high fuel prices (eg FFO adjusted leverage above 5.0x and FFO fixed charge cover below 1.5x on a sustained basis).
- Weakening of state support.
FULL LIST OF 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'
Foreign currency senior unsecured rating at 'BB-'
Local currency senior unsecured rating at 'BB-'
Expected local currency senior unsecured rating: assigned at 'BB-(EXP)'
National Long-term rating at 'A+(rus)'; Outlook Stable
National Short-term rating at 'F1(rus)'
National senior unsecured rating at 'A+(rus)'
Expected National senior unsecured rating: assigned at 'A+(rus)(EXP)'
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