Rating Agency Expert RA Confirms Aeroexpress Credit Rating at ruBB+ and Changes Outlook to Negative

The change in outlook is due to a significant decline in passenger volumes in 2020 amidst a general decrease in airport traffic in the Moscow Aviation Hub (MAH) due to the worsening coronavirus epidemic. The deterioration in the epidemiological situation led to the closure of many international borders and minimized air travel between Russia and other countries, which severely impacted the company's market capacity. Additionally, social distancing measures are expected to reduce the occupancy of public transportation. Consequently, the company's revenue is anticipated to decrease significantly by the end of 2020, leading to a negative reassessment of its debt burden and profitability. However, the postponement of major debt repayments from 2020-2021 to later periods will support the current rating level, and the agency appreciates the company's refinancing capabilities through preferential loans for systemically important organizations and other funding sources.

Aeroexpress LLC is a private carrier providing rail connections between Moscow and three key MAH airports: Domodedovo, Sheremetyevo, and Vnukovo. In 2019, the company served 12.2 million passengers.

The agency views the industry's prospects negatively due to a severe decline in passenger transport in 2020. The worsening epidemiological situation led to the closure of international borders and minimized air travel, impacting the company's market capacity. In the first half of 2020, passenger traffic through MAH airports decreased by over 50%, and the agency does not expect the results for the second half of the year to compensate for this decline. Social distancing measures are expected to further reduce public transportation occupancy. Moreover, the agency believes that the overall deterioration in macroeconomic conditions in Russia and globally will negatively impact the national currency and reduce demand for tourist services and, consequently, air travel. The agency expects a recovery in passenger volumes through MAH airports in 2021, but remains cautious about the likelihood of returning to 2019 levels within the next two years due to the cumulative effects of these factors.

Competition from taxis, car-sharing services, and improvements in transportation infrastructure in Moscow and the surrounding region are putting pressure on Aeroexpress's operations. In response to the declining average taxi fare, the company introduced a new unified tariff, reducing the cost of travel nearly by half. Additional stops have been added, and various projects are being tested to improve service quality.

The agency positively notes the increase in EBITDA in 2019 amid a slight decrease in revenue due to optimization of commercial and management costs. However, the company's debt burden remains a concern. As of March 31, 2020, the total debt to EBITDA ratio was approximately 5.9x. The CFO ratio to total debt also showed little change, remaining around 19%. The agency expects a rise in the debt to EBITDA ratio to above 10.0x due to decreased sales in 2020. Despite this, the company plans to maintain its capital expenditure program, which will pressure free cash flow and increase the risk of additional debt accumulation.

Operational profit growth led to a slight improvement in profitability metrics for the reporting period: return on assets was 0.8%, return on equity was 5.6%, and EBITDA margin was 44.1%. The agency anticipates that decreased revenue in 2020 will lead to negative financial results due to high operational leverage from a significant portion of fixed costs. However, the expected market recovery in 2021 should partially offset the effects of reduced revenue caused by the negative epidemiological situation.

The company's credit rating benefits from a favorable debt repayment schedule. Agreements have been reached to extend debt repayment terms from 2020-2021 to 2027 and 2030, leading to a positive reassessment of the current debt burden. Debt service ratios for the period March 31, 2020, to March 31, 2021, are assessed at 0.67 and 0.51, respectively. Debt payments in the next 12 months are covered by 2019 CFO and FCF by 162% and 139%, respectively. However, the agency expects significant deterioration in debt metrics next year due to lower operational profits and higher lease payments compared to 2020. The agency views the company's ability to refinance debt through loans from major creditors and preferential loans under Russian Government Resolution No. 582 as a positive factor, providing sufficient tools to mitigate cash flow risks. The availability of potential funding sources also supports liquidity forecasts for the next 18 months. The agency notes limited information transparency due to the lack of publicly available financial data for 2017-2018 and the absence of a controlling shareholder, which may increase risks of corporate conflicts.

As of March 31, 2020, Aeroexpress LLC's assets were reported at 39.7 billion rubles, equity at 6.2 billion rubles, revenue for Q1 2019 was 1.4 billion rubles, and net loss was 144 million rubles.