(The following statement was released by the rating agency)
Oct 15 -
-- Republican Investment Company (RIC) OJSC is fully owned by the Russian Republic of Sakha, and we consider it a government-related entity.
-- RIC invests primarily in infrastructure projects in Sakha, and in our view benefits from a high likelihood of extraordinary support.
-- We are assigning our ‘B’ long-term issuer ratings and ‘ruA-’ Russia national scale rating to RIC.
-- The stable outlook reflects our view that the high likelihood of extraordinary government support that we anticipate for RIC would counterbalance uncertainty regarding the company’s new and untested business model.
On Oct. 15, 2012, Standard & Poor’s Ratings Services assigned its ‘B’ long-term issuer credit rating and ‘ruA-’ Russia national scale rating to Republican Investment Company (RIC) OJSC. The outlook is stable.
The ratings reflect our view that there is a “high” likelihood that the Russian Republic of Sakha (BB/Positive/--; Russia national scale ‘ruAA’), which owns 100% of the company, would provide timely and sufficient extraordinary support to RIC in the event of financial distress. The ratings also incorporate RIC’s stand-alone credit profile, which we assess at ‘ccc+’ owing to the uncertainty of the company’s medium-term business strategy, lack of a track record, and a management without experience in commercial investment activity.
In accordance with our criteria for government-related entities (GREs), our view of a “high” likelihood of extraordinary government support RIC is based on our assessment of RIC‘s:
-- “Important” role in implementing Sakha’s investment program. The republic initially created RIC as a special-purpose company to construct a railroad and other regional transport and social infrastructure. In 2008-2011, RIC’s annual investments were on par with capital spending from the republic’s budget, equaling about Russian ruble (RUB) 7 billion (about $235 million) on average. The company is likely to complete the railroad project in the medium term and will continue to finance infrastructure projects and invest in regional enterprises; and
-- “Very strong” link with Sakha’s government, which owns 100% of RIC and doesn’t plan to privatize it at least until 2017. Sakha outlines RIC’s strategy, closely monitors its operations, and approves its development strategy and investment projects. The republic also delegates and appoints Sakha’s board of directors, which currently consists solely of Sakha government officials. Nevertheless, Sakha doesn’t provide an explicit guarantee for the timely repayment of RIC’s debt.
Accordingly, the rating on RIC is two notches higher than the SACP, which is at ‘ccc+'. The SACP reflects RIC’s lack of a track record, the management’s limited experience in commercial investment activity, and high implementation risks related to the new development strategy. This strategy envisions transforming RIC into a more commercially oriented company that invests in equity and debt of companies in Sakha.
RIC was set up as a special-purpose company to facilitate the financing of Sakha’s strategically important investment projects. Its transformation into a for-profit development institution will combine investments in commercially viable projects with the support of infrastructure in Sakha. In 2012-2014, RIC plans to complete the railroad construction project, currently its largest investment accounting for 32% of its assets, and transfer it to the republic (to be passed to the federal government) at cost.
The board of directors approved the new development strategy in August 2012. However, detailed documentation and medium-term financial plans are yet to be developed. In accordance with the strategy’s broad objectives, RIC will focus on managing Sakha’s assets and investing in commercial projects and infrastructure and other projects important for the republic’s development. The company intends for some projects to be financed jointly with other investors. Given no track record and unclear investment perspectives, we currently assess the implementation and execution risks related with the new strategy as very high.
With cash and bank deposits totalling RUB0.8 billion (1.8% of total assets) as of July 1, 2012, RIC’s liquidity position is not very strong, in our view. The company’s securities portfolio of RUB1.7 billion provides additional liquidity support. We think that if the plans for capital injections from the Republic of Sakha materialize, this should support RIC’s liquidity in 2012-2014.
Currently, RIC has no outstanding long-term debt, and its short-term borrowing does not exceed 8.6% of total assets. The company plans to increase medium-term borrowings, in accordance with its investment strategy, by about RUB13 billion in 2013.
The stable outlook reflects our view that the high likelihood of extraordinary government support that we anticipate for RIC would counterbalance uncertainty regarding the company’s new and untested business model.
We assess the probability of an upgrade within the next 12 months as highly unlikely at the moment.
We could lower the ratings within the next 12 months if we observed a decrease in the likelihood of timely extraordinary support from Sakha, due for example to RIC’s lower importance for the republic’s investment program than we currently assume in our base-case scenario. Negative developments in RIC’s financial profile while it is implementing its new investment strategy might also put pressure on the stand-alone credit profile and, consequently, on the ratings.
Related Criteria And Research
-- Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010
-- Rating Private Equity Companies’ Debt And Counterparty Obligations, March 11, 2008
Republican Investment Company (RIC) OJSC
Issuer Credit Rating B/Stable/--
Russia National Scale ruA-/--/--