Fitch Affirms Four Russian Private Leasing Companies
08 Dec 2016 11:17 AM
Fitch Ratings-London-08 December 2016: Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) of PJSC Europlan and Baltic Leasing JSC (BaltLease) at 'BB-', and of Sollers-Finance LLC (SF) at 'B+' and Carcade LLC at 'B+'. Fitch has revised the Outlook on BaltLease to Stable from Negative. The Outlooks are Stable on Europlan and SF and Negative on Carcade. A full list of rating actions is at the end of this commentary.
KEY RATING DRIVERS
IDRS, NATIONAL RATINGS AND SENIOR DEBT
The affirmation of Europlan and SF's IDRs with Stable Outlooks and the revision of the Outlook on BaltLease to Stable reflect the companies' solid performance through the cycle, stable low credit losses of the lease books helped by solid underwriting and a rigorous collection function, strong liquidity positions and low leverage. The Negative Outlook on Carcade reflects potential pressure on its leverage and weak operational results.
The companies are among the leading private leasing companies in Russia. Europlan and Carcade are pure retail, predominantly autoleasing companies, with passenger cars, trucks and light commercial vehicles combined making up 87% and 99%, respectively, of their lease books at end-6M16. BaltLease and SF have more lumpy and less liquid lease books. The former's non-auto leasing accounted for 46% of the book, while the latter focuses primarily on trucks and fleet deals.
The companies' core clientele are SMEs, which are highly sensitive to broader economic conditions. The high volatility of the underlying car market amplifies the cyclicality of auto leasing. The sharp downturn of auto sales in Russia (by 24% in 2015 and 1% in 10M16 as measured by volume, or 36% and 13% by number of cars) constrains origination of new leasing business. However, all the companies accelerated business origination in 9M16 and BaltLease and SL achieved portfolio growth. The quality of this growth in a contracting auto market is yet to be demonstrated.
The companies' credit losses have been very low due to effective foreclosure and sales. This is supported by i) high down payments, typically equal to 20%-25% of initial value, a higher 30% for SF; ii) the liquidity of the leased assets (typically mid-range passenger cars); iii) good repossession rates; and iv) the correlation of market stress with rouble depreciation, which tends to increase the value in local currency of foreclosed assets. Carcade and SF reported higher default rates in 2015-1H16 (calculated by Fitch at 12% and 7%, respectively, on an annualised basis). Carcade also demonstrated slower and less efficient foreclosures and collateral sales compared with peers.
Each of the four companies reported low leverage at end-1H16, with Fitch-adjusted debt/equity ratios ranging from 1.4x at Europlan to 5.4x at Carcade. Leverage has been supported by strong internal capital generation at Europlan, BaltLease and SL (driven by healthy margins, good cost efficiency and low credit losses), and by deleveraging (in particular in 2015) at all four companies. Fitch expects the less leveraged companies to increase their debt-to-equity ratios to around 4x-5x as a result of renewed business growth and/or capital distributions, but this would still be in line with their ratings.
Europlan's financial metrics are currently the strongest among peers, but Fitch expects leverage to increase after the completion of a group reorganisation in 1H17 (see 'Fitch: Europlan's Ratings Unaffected by Planned Reorganisation' dated 29 November 2016 at www.fitchratings.com). Contagion risks from the broader, highly leveraged Safmar group (formerly known as B&N Group) weigh on Europlan's ratings.
BaltLease's financial metrics are also strong, although the company has a shorter track record than Europlan and a somewhat narrower franchise. Debt at the shareholder level, taken on to finance the acquisition of a majority stake in the company, is sizable and may require significant dividend distributions to support its service. BaltLease has longstanding close ties with the Otkritie group, which continues to own a minority stake in the company and provide funding support.
Fitch adjusts Carcade's debt/equity ratio for receivables from its shareholder and a debt collection company, while the sizable stock of non-performing and foreclosed assets weigh on our assessment of leverage. Rapid deleveraging in 2H15-1H16 has supported the capital ratio, offsetting the impact of operating losses, but a turnaround in profitability will depend on the company's ability to generate new business and improve efficiency. Fitch understands that Carcade's owner, Poland's Getin Holding, is no longer actively seeking to sell the company, and is focused instead on improving its performance.
SF is considerably smaller than its three peers, but grew its lease book rapidly in 1H16 with big-tickets fleet deals in public transportation. However, the company's leverage (2.3x debt-to-equity at end-1H16) still leaves significant room for growth before this would start to put pressure on the company's financial profile. SF is jointly-owned by Russia-based Sovcombank (BB-/Stable) and Sollers, a group with various interests in the auto manufacturing industry.
The four companies are predominantly funded by Russian banks (as direct lenders or bondholders). Refinancing risk is limited, mitigated by the short tenors of lease books, which are largely matched by funding maturities. Europlan and Carcade have diversified bank loan portfolios, but are more dependent on market funding than BaltLease (whose outstanding bonds (around 75% of end-9M16 liabilities) are predominantly held by Otkritie, Fitch understands) and SF (which is currently funded almost exclusively by Sovcombank).
SENIOR DEBT RATINGS
Senior debt ratings are aligned with the companies' IDRs and National ratings, reflecting Fitch's view of average recovery prospects for unsecured senior creditors in case of default. This in turn is driven by the low to moderate proportion of company assets (ranging from 5% in BaltLease to 40% in Carcade of their lease portfolios) that have been pledged to secured creditors.
The Support Rating of '4' assigned to SF reflects Fitch's view that the company would likely be supported by Sovcombank case of deterioration in its financial position. This view takes into account support provided to date and SF's small size relative to Sovcombank (equal to less than 1% of assets). However, the only 50% ownership, the apparently non-strategic nature of the investment and Sovcombank's intention to refinance its funding of SF through bond issuance by SF make support somewhat less certain, in Fitch's view.
IDRS, NATIONAL RATINGS AND SENIOR DEBT
Upgrades are currently unlikely given the still challenging operating environment, expected increases in leverage from renewed business growth and capital distributions, small size (SF) and weak performance (Carcade).
The companies could be downgraded if asset quality and performance weaken significantly, to the extent that this results in a marked increase in their leverage ratios or compromises the quality of their capital.
Europlan and BaltLease could be also downgraded if Fitch concludes that their strategy, risk appetite, balance sheet structure and/or financial metrics are likely to significantly weaken following shareholders actions, or if the companies become significantly exposed to related parties, non-core assets or other contingent risks arising from the other assets of their owners.
SF's Long-Term IDR would only be downgraded if both its standalone financial profile deteriorated significantly and Sovcombank failed to provide timely support.
The Negative Outlook on Carcade reflects the risk that further negative operational results or losses on non-performing and foreclosed assets could put further pressure on capitalisation. If the company is able to return to sustainable profitability and avoid any further significant increase in its leverage, then we will likely revise the Outlook to Stable.
Senior debt ratings could be downgraded in case of a lowering of IDRs/National ratings, or a marked increase in the proportion of pledged assets, potentially resulting in lower recoveries for the unsecured senior creditors in a default scenario.
The rating actions are as follows:
Long-Term Foreign and Local Currency IDRs: affirmed at 'BB-'; Outlooks Stable
Short-Term Foreign Currency IDR: affirmed at 'B'
National Long-Term Rating: affirmed at 'A+(rus)'; Outlook Stable
Senior unsecured debt: affirmed at 'BB-'/'A+(rus)'
Baltic Leasing JSC
Long-Term Foreign and Local Currency IDRs: affirmed at 'BB-'; Outlooks revised to Stable from Negative
Short-Term Foreign Currency IDR: affirmed at 'B';
National Long-Term Rating: affirmed at 'A+(rus)'; Outlook revised to Stable from Negative
Senior unsecured debt of Baltic Leasing LLC: affirmed at 'BB-'/'A+(rus)'
Long-Term Foreign and Local Currency IDRs: affirmed at 'B+'; Outlooks Stable
Short-Term Foreign Currency IDR: affirmed at 'B';
National Long-Term Rating: affirmed at 'A(rus)'; Outlook Stable
Support Rating: assigned at '4'
Expected Senior unsecured debt: assigned at 'B+(EXP)'/'A(rus)(EXP)'; Recovery Rating 'RR4(EXP)'
Long-Term Foreign and Local Currency IDRs: affirmed at 'B+'; Outlooks Negative
Short-Term Foreign Currency IDR: affirmed at 'B'
National Long-Term Rating: affirmed at 'A-(rus)'; Outlook Negative
Senior unsecured debt: affirmed at 'B+'/'A-(rus)'; Recovery Rating 'RR4'
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