OREANDA-NEWS. Fitch Ratings has assigned RVK-Finance LLC's RUB3bn bonds due in November 2020 a final local currency senior unsecured rating of 'BB-' and a final National senior unsecured rating of 'A+(rus)'.

The bonds were issued by RVK-Finance LLC, a wholly-owned indirect subsidiary of Ventrelt Holdings Ltd (Ventrelt or the group, BB-/Stable). The bonds benefit from sureties provided on a several basis by certain group subsidiaries. The senior unsecured rating is assigned at the same level as Ventrelt's Long-term local currency Issuer Default rating.

Ventrelt is a leading private water and waste water operator in Russia. Its ratings reflect the company's long-term leasing and concession agreements with municipalities to provide essential infrastructure services, forecast leverage increase over 2015-2018, refinancing needs and a complex existing funding structure.

The ratings are constrained by Ventrelt's limited size and diversification relative to larger peers and 'BB'-rated Russian companies, as well as an evolving regulatory framework for concession agreements and tariff-setting. In addition, its capex relative to cash flow is sizeable and results in negative free cash flow (FCF).

KEY RATING DRIVERS
Senior Unsecured Equal to IDR
The bonds benefit from sureties totalling RUB3bn provided on a several basis by RVK-Invest LLC, Krasnodar Vodokanal LLC, Tyumen Vodokanal LLC, Barnaul Vodokanal LLC and Voronezh Vodokanal LLC, which are all wholly-owned indirect subsidiaries of the group.

The senior unsecured rating is equal to Ventrelt's Long-term local currency IDR, reflecting that the level of prior-ranking debt being below Fitch's threshold of 2x-2.5x EBITDA. In addition, the combined EBITDA of subsidiaries providing sureties for the bonds comprised 66% of the group's 2014 EBITDA.

Ventrelt will use the proceeds of the bond issue to refinance its existing debt obligations and finance investment programme for 2016.

Weaker Credit Metrics Expected
We expect Ventrelt's financial profile to deteriorate over the medium term but to remain comparable with that of similarly rated regulated utilities. This is due to high capex resulting in negative FCF throughout the forecast period of 2016-2019 and our assumptions of tariff growth being largely below regulator-approved levels and high interest rates for new debt.

We expect net debt/connection fee-adjusted EBITDA to increase to slightly below 4x by 2018, approaching Fitch's negative rating guideline of 4.0x. Funds from operations interest coverage adjusted for connection fees was 3.3x at end-2014 and Fitch expects that interest cover will remain in the low single-digit territory.

Long-term Tariffs Approved
The regulators have approved long-term tariffs for all Ventrelt's water channels for 2015-2019. The indexation is based on inflation and also takes into account volume reductions in each of the water channels. There were some changes in the legislation regarding tariff policy in the water channels in July 2014. The regulator is currently expected to include a minimum 5% operating margin into the tariff, which the company can keep. Coupled with the long-term tariff approval, this allows Ventrelt to generate profit in each of the water channels as well as improve the predictability of earnings and cash flows.

We conservatively forecast that long-term tariffs may be revised downwards and therefore subtract 2% from approved annual tariff growth for both water supply and water drainage for each of the water channels.

Limited Impact from Tough Economy
The slowdown in Russia's economy has so far had limited impact on the company's performance and tariff-setting. Ventrelt provides services mainly to households, which are heavily affected by the downturn. However, the company's cash collection rates remain at historical levels of 98% and do not materially impact working capital.

Expansion Strategy
Ventrelt remains Russia's leading private water and wastewater operator operating under the name of Rosvodokanal, serving about 6 million customers in Russia, operating about 23,000km of water and sewerage pipelines and supplying over 450 million cubic metres of water annually. In 2014, Ventrelt reported revenues of RUB15bn, a 1.2% increase YoY.

Its strategy envisages further expansion into Russian cities with at least 350,000 residents. It plans to participate in most of the available tender for concession agreements, although the company plans to remain focused on profitability, according to management. We view this as an aggressive target given potential investment needs and considering that most Russian water utilities continue to be owned by municipalities.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Domestic GDP decline of 4% and inflation of 15.5% in 2015
- Tariffs to increase 2% below approved annual tariff growth
- Capital expenditure in line with management's forecasts
- Absence of dividend payments over 2015-2019

RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action, include:
- Increased revenue and earnings visibility following the implementation of long-term tariffs;
- Sustained positive FCF generation.

Negative: Future developments that may, individually or collectively, lead to negative rating action, include:
- An increase in leverage above 4x net debt/connection-fee adjusted EBITDA to fund additional capital expenditure or acquisitions;
- A sustained reduction in cash generation through a worsening operating performance or deteriorating cash collection.

DEBT AND LIQUIDITY STRUCTURE
At 31 October 2015, Ventrelt had short-term debt of RUB3.8bn against cash and cash equivalents of RUB2.2bn. A major part of outstanding debt was represented by RUB3bn 9.6% bonds that matured at 9 November 2015. Ventrelt has procured bridge credit facilities for RUB3bn due in November 2016 from multiple banks, which were subsequently refinanced with issued bonds. At 31 October 2015, all outstanding loans were denominated in Russian rouble.