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Georgian Railway Long-Term Rating Raised To 'BB-' On Extension Of Modernization Project Timeline; Outlook Stable

March 16, 2012 | Standard & Poor's

•We believe Georgia's rail infrastructure operator Georgian Railway LLC (GR) has improved its financial risk profile by extending the timeline for its modernization project.

•GR has adequate liquidity under our criteria and we consider that the likelihood of government support to GR, if needed, is extremely high.

•We are raising our long-term rating on GR to 'BB-' from 'B+' and affirming the 'B' short-term rating.

•The stable outlook reflects our belief that GR's financial risk profile will not change in the next year.

March 15, 2012--Standard & Poor's Ratings Services said today it raised its long-term foreign and local currency rating on Georgian state- owned rail infrastructure operator Georgian Railways LLC (GR) to 'BB-' from 'B+'. . We also affirmed the 'B' short-term rating on GR. The outlook is stable. 

The upgrade reflects our view that GR has improved its financial risk profile by extending the timeline for its modernization project. This lowers the risk of the company not being able to repay its Eurobond due in 2015. We also understand that the government of Georgia (BB-/Stable/B) has told GR it might provide financial assistance for a project to build a rail route bypassing the country's capital city Tbilisi, if it is needed. GR's business risk profile has not changed and is still weak because of the company's reliance on the cyclical commodity business for most of its revenues. The company also relies on transit traffic.  

While we expect GR's funds from operations (FFO)-to-debt ratio to exceed 45% and debt to EBITDA to be no higher than 1.6x in 2012-2013, we still believe the company will show negative free operating cash flow throughout the same period. This reflects its aggressive capital expenditure (capex) program, which it has lengthened to enable better funding of its expenditures through ongoing revenues. Most of this capex is still discretionary, because the company could scale back or postpone most of the investments if necessary.  

We consider GR to be a government-related entity (GRE). In accordance with our criteria for GREs, our view of an "extremely high" likelihood of timely and sufficient extraordinary government support is based on our assessment of GR's: 

•"Critical" role for the Georgian government, given GR's monopoly position as the manager and owner of the national rail infrastructure and sole nationwide rail freight provider. 

•"Very strong" link with the Georgian government, given its 100% direct and indirect ownership of the company and the government's role in appointing GR's key board members, and our expectation that GR will not be privatized in the short term. 

We don't factor any uplift into the rating on GR to reflect the "extremely high" likelihood of government support because we rate GR at the same level as the sovereign. 

The stable outlook reflects our belief that GR's financial risk profile will not change in the next year.  

The extension of GR's timeline for the modernization project has improved the company's financial risk profile and liquidity position. 

We would expect the company to continue maintaining a close watch on its capex and to show it can extend and control the capex if necessary, so that it maintains, or improves, its current financial risk profile. We also expect GR to refrain from distributing any dividends for as long as the repayment of its Eurobond, or its refinancing for a longer period, has not been resolved. We would expect the company to maintain a debt-to-EBITDA ratio, as we calculate it, of no more than 2x in coming years, which we would view as commensurate with the current rating. A downgrade of Georgia could have a negative effect on GR because of the critical role of the company within the country. We would only consider a positive action on GR if we upgraded Georgia.

Issue: Georgian Railway, 9.875% 22jul2015, USD

StatusCountry of riskMaturity (option)AmountIssue ratings (M/S&P/F)
redeemedGeorgia07/22/201527,520,000 USD-/NR/BB-

Company: Georgian Railway

Full company nameGeorgian Railway LLC
Country of riskGeorgia
Country of registrationGeorgia


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