Compliance of the issue of with Regulation of the Bank of Russia dated December 19, 2019 No. 706-P

As part of the social bond issue of SPV Transport infrastructure LLC (hereinafter, the Issuer), ACRA verified the compliance of project that is planned to be refinanced using the proceeds from the bond issue for purposes related to financing and/or refinancing of projects aimed at developing public life and complying with internationally recognized principles and standards in the field of social financing and/or sustainable development (condition on the targeted use of funds received from the placement of bonds) (in accordance with Regulation of the Bank of Russia dated December 19, 2019 No. 706-P). The project presented by the Issuer involves refinancing of previously incurred costs for the construction of the third start-up complex of the Central Ring Road of the Moscow Region (hereinafter, CRR 3).

The project will allow the following goals to be achieved:

  1. Removal of heavy-duty and transit vehicles from the radial exits from Moscow and the city’s road network, which will have a positive effect on the air quality, environmental situation, and level of comfort for the city’s residents.
  2. Creation of conditions for comprehensive development of the transport and social infrastructure and territory of Moscow and the Moscow Region, as well as neighboring regions — the Tver, Yaroslavl, Vladimir, Ryazan, Kaluga, Tula, and Smolensk Regions — due to the multiplier effect produced by the construction of the CRR (including its third section, CRR 3).
  3. Strengthening of social, economic, interregional and international ties, increasing the level of mobility of the population and market participants.
  4. Increasing road safety and the quality of services provided to motorists.
  5. Reducing the cost of transportation and the level of transportation costs for shippers.

The implementation of the project involves developing major logistics centers along key railroads and roads in the Moscow Region and the territories affected by the project.

Further implementation of the CRR 3 construction project may in total provide for the creation of around 50,000 jobs in the Moscow Region (according to the Issuer’s estimates), including within the framework of the creation of residential complexes, office and business sites, shopping centers, small hotels, cafes, gas stations, etc.

Construction of CRR 3 will broaden the socio-economic opportunities of the population due to the formation of a new industrial and residential belt in the middle zone of the Moscow Region, which in turn will lead to significant transformations in the settlement system, the proportions of population distribution, and labor commuting.

Construction of CRR 3 will have a positive impact on six municipal entities in the Moscow Region (Solnechnogorsk, Dmitrov, Pushkino, and Shchyolkovo Municipal Regions, as well as the Chernogolovka Urban District and the Bogorodksy Urban District) due to reduced load on regional roads and lower air pollution in the aforementioned municipal entities, as well as better transport accessibility for residents.

The construction project provides for the implementation of measures aimed at reducing the consequences of the road’s negative impact on the environment, including the construction of noise protection screens and local treatment facilities, and the installation of eco ducts. These and other technical parameters of the project received a positive conclusion from Glavgosekspertiza of Russia. In addition, the implementation of the project is being controlled by international engineering company AECOM, which confirms the high-quality study of the economic, environmental, and social aspects of construction.

The quantitative criteria of the project’s implementation will be:

  • Average traffic intensity by 2030: at least 40,000 vehicles per day, most of which will be freight traffic;
  • Number of beneficiaries represented by residents of municipalities, through which CRR 3 passes: at least 900,000 people.

Under this issue, funds are raised to refinance project costs that have already been incurred. Selection of new projects is not envisaged. Therefore, ACRA notes the compliance of the project with purposes related to financing and/or refinancing of projects aimed at developing public life and complying with internationally recognized principles and standards in the field of social financing and/or sustainable development (condition on the targeted use of funds received from placement of bonds).

ACRA confirms that the planned bond issue of the Issuer complies with all basic Social Bond Principles (SBP) of the International Capital Market Association (ICMA). The use of proceeds, project evaluation and selection process, approaches to managing proceeds, and the Issuer’s reporting as described in the document Social Bond Issuance Concept (hereinafter, the Social Bond Framework) fully meet the SBP criteria. Therefore, ACRA considers the Issuer’s planned bond issue to be social.

Key issue properties

Issuer

SPV Transport infrastructure LLC

Issuer’s credit rating

-

Expected credit rating of the program/issue

eAA(RU)

Type of security

-

Planned issue volume

up to RUB 14 bln

ISIN

TBD

Planned placement start date

TBD

Planned maturity date

April 5, 2033

 

The Issuer is SPV Transport infrastructure LLC. The Issuer’s activities involve, among other things, the acquisition of rights of claim for part of a syndicated loan issued for the implementation of the CRR 3 construction project within the framework of the Concession Agreement.

On September 16, 2016, LLC Road Construction Corporation (hereinafter, the Concessionaire) and the Russian Federation represented by the State Company “Russian Highways” (hereinafter, the Concessor; AA(RU), outlook Stable) entered into the Concession Agreement. LLC Road Construction Corporation is part of Avtoban Group of Companies (hereinafter, Avtoban GC, A-(RU), outlook Stable).

The Concessionaire was provided debt financing to carry out the project, including via a syndicate of banks — Bank GPB (JSC) (hereinafter, the Originator, or Gazprombank; AA+(RU), outlook Stable), Sberbank (AAA(RU), outlook Stable), and Eurasian Development Bank (hereinafter, EADB; AAA(RU), outlook Stable), which provided the Concessionaire with a total credit limit of RUB 39.9 bln (hereinafter, the Syndicated Loan). According to the Concession Agreement, the total volume of expenses on the construction of CRR 3 stands at RUB 100.8 bln.

Proceeds from the planned issue of the Issuer’s social bonds will be used to partially refinance the funds borrowed to construct CRR 3.

Key assessment factors

The Issuer provided ACRA with documents reflecting the social and environmental criteria for the acceptability of sustainable development project financed by the Concessionaire and Originator, which determined the choice of key characteristics of the project being implemented (construction of CRR 3). The project’s characteristics allow it to be categorized as assets that have a pronounced positive social effect and do not produce a substantial negative impact on the environment. They include the process of selecting sustainable development projects financed by the Originator, approaches to managing proceeds, and reporting. ACRA assessed the bond issue’s compliance with the four SBP based on these documents.

SBP assessment

Source: ACRA

Use of proceeds

The objectives of the planned issue of the Issuer’s social bonds are clearly formulated and comply with the SBP. Proceeds from the planned issue will be used to partially refinance funds obtained to construct CRR 3, the implementation of which significantly improves the quality of life of more than 900,000 people living in the nearby area and also ensures the creation of up to 50,000 jobs due to direct and indirect effects (according to the Issuer’s estimates).

In addition, in order to comply with the requirements of Regulation of the Bank of Russia dated December 19, 2019 No. 706-P, investors have the right to demand early redemption of their bonds in the event of misuse of the proceeds. ACRA is of the opinion that this obligation is an additional indication of the Issuer’s intention to use the proceeds from the planned bond issue to refinance the CRR 3 social construction project.

Project evaluation and selection procedure

As part of the planned bond issue, the Issuer has selected some acceptable categories of ICMA projects that correspond to its current specialization. These include:

  • Formation of convenient base infrastructure;
  • Ensuring access to socially important services;
  • Development and formation of a wealthier social and economic environment.

UN SDG1 that the eligible project has to comply with:

  • SDG No. 8: Promote inclusive and sustainable economic growth, employment and decent work for all;
  • SDG No. 9: Build resilient infrastructure, promote sustainable industrialization and foster innovation.
 

1 SDG means UN Sustainable Development Goals (https://www.un.org/sustainabledevelopment/sustainable-development-goals/).

The Issuer intends to apply the following key performance indicators:

  • Easing the traffic on the congested Moscow Ring Road and A-107 Moscow Small Ring federal highway, by connecting areas in the north-east of the Moscow Region and redistributing the flow of transit vehicles in bypass of these roads;
  • Developing transport infrastructure in the northeastern part of the Moscow Region, promoting economic ties between districts of the Moscow Region, increasing the mobility of the population and market entities;
  • Providing high-speed high-capacity interregional and intraregional transport links;
  • Creating taxable assets by expanding economic and investment activities in the economic sectors adjacent to the transport sector, increasing social activity and mobility of the population.

This approach fully complies with the SBP.

Management of proceeds

According to the Social Bond Framework, proceeds from the issuance of bonds will be used to acquire rights of claim for part of the Syndicated Loan issued to the Concessionaire by Gazprombank. All funds sent by the Concessor to service and return the loan investments under the terms of the Concession Agreement (with regard to the Originator’s refinanced tranche) will be credited to the security account, the rights to which shall be transferred to the bondholders. Therefore, this will ensure cash management of the funds received from the placement of bonds.

According to the rules for issuing green and social bonds effective in Russia, temporarily free proceeds from the issuance of social bonds should not be applied to finance projects that are not aimed at developing public life. In this case, due to the one-time application of proceeds to refinance the debt to the Originator, no temporarily free funds from the issuance of social bonds will emerge.

Reporting

According to the Social Bond Framework, all refinancing costs have already been incurred under the Syndicated Loan. Nevertheless, up until the due date of the social bonds, the Issuer will publish annual social bond reports on its corporate website.

The Issuer intends to disclose information on the use of proceeds from the issuance of social bonds, as well as on the impact that CRR 3 has on the public environment and sustainable development of the nearby region.

The following information will be disclosed:

  • Amount of investments made in the project;
  • Project progress;
  • Results achieved through the implementation of the project.

Regular reports of the Issuer on social financing will be posted on its website.

Additional assessment factors

Organizational structure of the project and strategy

Since the Issuer is a special purpose vehicle, ACRA is of the opinion that the application of proceeds will be clear and transparent, as the Issuer does not conduct any other business, except for the issue and servicing of the bond.

The strategic planning of Avtoban GC is assessed as high. Avtoban GC has a long-term development program until 2024, which implies an increase in market share and contract base and maintaining consistently high profitability. To achieve its strategic goals,  Avtoban GC intends to improve its competencies in design, construction and operation of infrastructure facilities.  Avtoban GC is active in the field of PPP projects, including the concession segment.

It is important to note that Avtoban GC offers a full range of road construction works, and it is also active in the construction of social facilities, design and construction of housing and business centers. Over the past 20 years, 34 construction projects have been built with a total area of 170,000 sq. m, including 20 residential buildings with a total area of more than 60 sq. m each, seven kindergartens, three schools, a 500-seat sports complex including an ice arena with a total area of 5,000 sq. m, a fish processing plant, and the Museum of Nature and Man.

All this allows us to characterize the strategic focus of Avtoban GC on the implementation of sustainable development goals as strong.

Financial feasibility of projects

The CRR 3 project has undergone numerous reviews by the Originator. In addition, the construction and operation of the project is monitored by AECOM, a third-party contractor. Taking this into account, ACRA considers the project refinanced by SPV Transport infrastructure LLC through the issue of social bonds to be financially feasible.

Key assumptions

Any potential social and environmental risks of the project are included in the project documentation, and they will not impair the quality of life of the population in the areas affected by the social infrastructure asset.

Assessment components

Compliance of the issue with SBP: yes.

Assessment score: SR1.

Regulatory disclosure

The assessment of the project refinanced as part of the social bond issue of SPV Transport infrastructure LLC for compliance with internationally recognized principles and standards in the field of social financing and/or sustainable development, as well as of the bonds themselves — for compliance with the SBP, have been performed based on the Methodology for Assessing Social Debt Obligations and Sustainable Development Debt Obligations with regard to social bonds.

ACRA has published its opinion on the compliance of the project refinanced by the Issuer with internationally recognized principles and standards in the field of social financing and/or sustainable development, and also on the compliance of the bonds of SPV Transport infrastructure LLC with the SBP for the first time. The compliance assessment may be revised within one year following the publication date of this press release.

ACRA’s opinion on the compliance of the project refinanced by the Issuer with internationally recognized principles and standards in the field of social financing and/or sustainable development, and also on the compliance of the issue of social bonds with the SBP is based on data provided by SPV Transport infrastructure LLC, information from publicly available sources, and ACRA’s own databases. The assessment of compliance of the social bonds and the project refinanced by the issuer was solicited, and SPV Transport infrastructure LLC participated in the assessment process.

In assigning the assessment, ACRA used only information, the quality and reliability of which was, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.

No conflicts of interest were discovered in the course of the assessment process.

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