How to earn 11.5% per annum on toll roads

Buying bonds of Avtodor Group of Companies is a defensive strategy for investors who are not ready to take risks


Underdeveloped transport infrastructure is costly for Russian carriers. Almost exhausted throughput, poor coverage and, accordingly, many hours of traffic jams, low speed and high fuel consumption turn out to be huge costs for them, reducing the attractiveness of the business. An alternative is toll roads: last year alone, the traffic on them increased by 43%. Toll roads in Russia are handled by the Avtodor Group of Companies.


✔ Investment idea
✔ Drivers of growth in road construction
✔ Financial condition of Avtodor Group of
Companies ✔ Debt burden of Avtodor
✔ Risks of buying Avtodor bonds

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Investment idea

Avtodor bonds are suitable as a defensive strategy for those investors who are not ready for increased risk. recommends choosing 1p2 bonds maturing in December 2019. These securities are traded with a  yield to maturity of 7.23% per annum, which is almost one percentage point higher than the deposit rate in the 10 largest banks. At the same time, Avtodor is a completely state-owned company, financed from the state budget. The government is also responsible for its obligations, that is, the risk of investing in these securities is about the same as  investing in OFZs . If you buy securities through IIS, the income received from the tax deduction will be added to the current profitability , and the total profitability of the strategy will be 11.5% per annum. At the same time, the 1p2 issue was placed in 2017, which means that its coupon is not subject to personal income tax .

How does Avtodor’s business work?

Drivers of road construction growth

Cars and buses are the main means of transport in Russia, accounting for about 70% of freight traffic (in millions of tons) and 90% of passenger traffic (in millions of passengers, excluding travel by personal cars). The road network  – about 1.5 million km of public roads (federal roads account for about 52,000 km), of which only 41.5% meet regulatory requirements. And although the state spends hundreds of billions of rubles annually on the repair and construction of highways, this is not enough for significant changes. Infrastructure has been underfunded for many decades, and in recent years budget spending on it has decreased by almost a quarter – from 724 billion rubles. in 2014 to 550 billion in 2017.

President Vladimir Putin, even before his re-election, promised to rectify the situation and allocate 11 trillion rubles for the roads. (for the entire past presidential term, the cost of road infrastructure amounted to 6.4 trillion rubles). The promised spending will fall not only on the shoulders of taxpayers: from the state budget, the road will receive only 8.4 trillion rubles. The rest must be invested by private investors . However, such a significant increase is still not enough, Mikhail Blinkin, director of the Institute for Transport Economics and Transport Policy, explained to Vedomosti: there is not enough money for all priority projects. Thus, with the growth of freight and passenger traffic, toll roads will not be empty.

According to Russia’s transport strategy , by 2030, another 12,000 km should be added to the approximately 2,000 km of existing high-speed railways . Avtodor Group of Companies, which is responsible for their condition and development, is ready to build all 15,000 km, 8,000 of which – until 2025. According to the company and the Ministry of Transport, all construction will require about 7 trillion rubles, by 2025 – 3.8 trillion How many kilometers of the built will be paid is still unknown. According to Avtodor’s long-term program until 2021, the length of toll roads in its portfolio should increase by another 500 km in the next 4 years .

Map of future roads of Avtodor

Source: Avtodor

Financial condition of GC “Avtodor”

Avtodor was established in 2009 as a structure that will build and maintain a network of high-speed highways and develop infrastructure facilities, and not at public expense, but on the basis of a public-private partnership : the company builds roads, they become the property of Russia, and Avtodor becomes the manager . Now under his control  are the highways M1 “Belarus” , M4 “Don” and  M3 “Ukraine” , which are undergoing a comprehensive reconstruction, and  A-107 “Moscow Small Ring” . In addition, the company is responsible for the construction of the M11 Moscow – St. Petersburg highway and Central Ring Road (TsKAD) . The length of all tracks at the beginning of 2017 was about 3,000 km, the toll sections at the beginning of 2018 accounted for 810 km.

Avtodor earns on remuneration for its services as a manager  – the fare that the company collects on behalf of the state does not end up in its revenue. This is exactly why the revenues are small: in 2017, according to the consolidated financial statements, they did not even reach 1 billion rubles. The main articles are the sale of contactless smart cards and transponders and the sublease of land.

Although the state budget covers Avtodor not only the costs of  capital investments in the construction and reconstruction of roads (in 2017 – 378.3 billion rubles) and their maintenance and repair (24.2 billion), but also partially administrative and financial costs , the company is operating on the brink of profitability . If in 2016 the net profit amounted to 1 billion rubles, in 2017 Avtodor showed a loss of 195 million.

Debt burden of the Avtodor company

Huge expenditures for the construction of highways require significant investments , mainly from the state budget. In 2016, as indicated in the annual report of Avtodor, the share of private financing of projects was only 14.5% instead of the planned 52%. The company, however, explained such a deviation in the indicator by the postponement of the concession tenders for the construction of start-up complexes No. 3 and No. 4 of the Central Ring Road and by amending the construction certificate of this facility. But in 2017, although the volume of borrowed funds increased 1.8 times by 36.3 billion, construction costs increased by almost 100 billion. 

Construction costs, RUB bln

Source: consolidated financial statements of Avtodor under IFRS

The growth of borrowed resources was provided by new bonds : with their help, the company’s bond portfolio grew by 25.4 billion rubles over the year. up to 59.1 billion. But loans under  debt investment agreements increased by only 11 billion rubles to 22.4 billion rubles. How wide is the circle of owners of securities “Avtodor” is unknown, but, as stated in the company’s report for the 4th quarter of 2017, only  the portfolio of Gazprombank listed bonds 3 series maturing in g 2042 . by more than 21.7 billion rubles. (all bond issue ). The funds of the National Wealth Fund were invested in these securitiesreceived by the bank for financing the Central Ring Road. Another 16.7 billion rubles. Gazprombank sent from the  NWF to buy out another – the 4th issue –  bonds of Avtodor with maturity in 2044. But there is no information about the  bondholders in the company’s report.

At the same time, GPB also invested in other Avtodor securities – for example, Series 4 for 16.7 billion rubles, which were bought by the Ministry of Finance and banks that attracted funds from the National Welfare Fund.

Avtodor’s credit quality was assessed by all three leading international rating agencies : Fitch and Moody’s ranked the company on a par with Russia (BBB- and Ba1 with a positive outlook, respectively), and Standard & Poor’s – one notch lower (BB +). But while S&P and Fitch classify investments in  Russian sovereign obligations as  investment grade , Moody’s still considers them speculative.

Fitch argues its decision simply: Avtodor is financially integrated with the state, since the company is included in the federal budget as a separate item. Therefore, the agency’s analysts, assigning a rating to the company’s bonded loans , note that a significant part of them will either have a direct state guarantee for the principal amount of the debt, or will be issued in the interests of state development institutions. And the Russian rating agency ACRA in its report on Avtodor indicates that in accordance with the company’s program of activities approved by the government order in October 2017, the entire principal debt , as well as at least 50% of the coupon, will be served from the federal budget.

Borrowed funds, RUB bln

Source: consolidated financial statements of Avtodor under IFRS

Risks of buying Avtodor bonds

  1. Construction times are often delayed, reducing the investment attractiveness of projects. Toll highway “Moscow – Petersburg, for example, they promised to build for the 2018 FIFA World Cup, but due to a number of serious problems (long elections of contractors, delays in salary payments, etc.), at best half of the track will be built for the competition. The same is with the Central Ring Road, and not at all due to a lack of funding. The builders are hindered not only by the owners of the seized land, but also by infrastructural problems – a huge number of pipelines, power lines and communications on their way, the transfer of which requires a lot of approvals and technical conditions from their owners (Gazprom, Transneft, MOESK, etc. ). And with the 4th complex, the situation is not at all easy: after financing the project last yearthe Leader Management Company refused, this year the barely found Turkish Makyol left the project. The commissioning of the highway has already been postponed from the end of 2019 to December 2020, and it is still unknown what the loss of another investor will turn out to be.
  2. Another big problem is the status of concessions with full compensation from the budget. The Federal Antimonopoly Service, for example, believes that such projects are nothing more than government purchases that should be conducted on a competitive basis. The cancellation of the results of the competition for the construction of the Sterlitamak – Magnitogorsk road, initiated by the service, put the entire market in a stupor. The Moscow Arbitration Court recognized that the state could not bear all the costs. And even the subsequent defeat of the FAS in this litigation did not reassure potential investors too much .at risk of facing a similar claim. The amendments prepared by the Ministry of Finance, designed on behalf of Prime Minister Dmitry Medvedev to consolidate the legality of concessions with full compensation, only added fire: they allow 100% compensation, but postpone it until the facility is fully commissioned.
  3. Due to the untimely commissioning of toll sections, the state-owned company for several years did not fulfill the plan to collect tolls: for 5 years since 2012, Avtodor, according to the Accounting Chamber, has not collected 5.6 billion rubles. The task was completed only last year – with the planned 8.6 billion rubles. in fees, the company received 8.9 billion. But with new delays, it will not be easy to build on the success in the future.
  4. However, Avtodor’s management knows a way to close the backlog: having promised last year that  the fare on the Moscow-St. Petersburg highway would not exceed 1,000 rubles, Avtodor CEO Sergei Kelbakh forgot his promises in just a few months , and travel between the two capitals, according to the new tariffs , will cost 2000 rubles. Such unpredictable pricing can lead to a decrease in freight and passenger traffic, especially since the real payment is much higher than the previously announced amounts.

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