Strong economic growth across the CIS region in the past two years has resulted in the emergence of many Russian companies with the appropriate business models, experienced management and critical size that help them qualify for debt issuance and other transactions in the international capital markets, according to a Moody’s Investors Service Special Comment. Ratings for these corporates have thus become an important feature in the Russian and other CIS markets.
“Despite an expectation of a slowdown in economic growth in 2008 in light of inflationary pressures, continuing rouble appreciation and the potential failure to address energy sector constraints, most observers anticipate that an increasing number of Russian companies outside the natural resources sector will have recourse to the international capital markets to meet their refinancing needs,” said Matthias Hellstern, a Moody’s Vice-President/Senior Credit Officer and co-author of the report.
The average Moody’s rating level for Russian corporate issuers is currently Ba2. “This is driven not only by the improving credit profiles of many companies but also by an increasing number of ratings being assigned to non-state-supported companies outside the strategic natural resource and infrastructure sectors, which generally have lower ratings than companies related to natural resources and/or state ownership,” explained Hellstern.
As at the end of 2007, Moody’s universe of publicly rated Russian corporate issuers had grown to 50. Of these, 13 are government-related issuers, i.e. entities partly or majority owned by the Russian government or, in one case, a regional government.
The Moody’s report focuses on four key Russian sectors — oil and gas, electric utilities, telecoms operators, and steel and coal companies. It also presents a number of general risk issues that broadly apply to the Russian corporate debt market as a whole.
“Firstly, a prolonged period of underinvestment requires Russian corporates to make significant capital injections to remain globally competitive; this is likely to result in very low or even negative free cash-flow generation, constraining companies’ ability to reduce indebtedness in the short to medium term. Secondly, Russian corporates tend to still display weak or developing corporate governance standards, practices and procedures, thus constraining their ratings. Thirdly, despite a general stable situation for the liquidity of most issuers, some companies may find their financial flexibility under threat if the current global liquidity and credit crisis continues,” said Hellstern.
Finally, Moody’s noted that the regulatory environment in Russia is continuing to improve, albeit at a slow pace, and some weaknesses in this area, including some enacted legislation that has yet to be implemented, remain an ongoing concern.
