Fitch Affirms Rosagroleasing at 'BB'; Outlook Stable
21 Dec 2016 10:30 AM
Fitch Ratings-London-21 December 2016: Fitch Ratings has affirmed JSC Rosagroleasing's (RAL) Long-Term Issuer Default Rating (IDR) at 'BB' with a Stable Outlook. A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS
IDR AND NATIONAL RATINGS SENIOR DEBT
RAL's ratings are driven by potential support from the state. In assessing support, Fitch views positively: (i) RAL's 100% state ownership and track record of past equity injections; (ii) the low cost of potential support given the company's small size and low leverage (iii) the company's role (albeit somewhat limited) in the execution of state programmes to support the agriculture sector.
At the same time, the two-notch difference between the company's Long-Term IDR and those of the Russian sovereign (BBB-) reflects RAL's lower systemic importance and policy role compared with large state banks, specifically Russian Agricultural Bank (BB+), in supporting the agricultural sector. It also factors in potentially weaker support propensity given the company's weak performance and previous corporate governance failings leading to large credit losses, as well as potential further problems, which may require extra provisioning.
RAL is a state-owned leasing company focusing on subsidised directed leases to customers from the agricultural sector. Leases under the government sector support programme dominate the portfolio (97% of net investments in lease (NIL) before reserves at end-2015), and is generally funded by state capital injections. The subsidised book has been stable in recent years, as the company is using proceeds from lease repayments for issuance of new leases, while the commercial book (and hence lending from third parties) has been gradually amortising and RAL does not intend to increase it.
RAL operates in a segment with high operational, market and fraud risks. Governance failings under previous management prior to 2010 additionally weigh on asset quality metrics (80% of credit reserves have been made against legacy leases). The company does not write off problem assets and therefore the share of NPLs (over 90 days overdue) was a high 43% of end-2015 NIL plus lease receivables (the last date at which data is available), 56% of this was reserved. Exposures that are overdue by less than 90 days amounted to another 9% of NIL. Total unreserved problematic NIL was RUB14.5bn or 27% of equity.
In addition, RUB19.6bn of other assets were problematic (these include trade and other receivables and advances paid) but these were almost fully reserved.
Given the company's low leverage (debt-to equity ratio of 10% at end-2015), it has the capacity to comfortably reserve problem assets. However, the newly issued leases may be a source of additional risks.
RAL has no plans to increase leverage, and given the small capital contribution of RUB1.3bn it expects in 2017 the company will rely on reinvesting proceeds from the existing lease portfolio. RAL is included in the state programme of agricultural development for 2013-2020, but any expansion of new originations will depend on capital injections.
RAL's borrowings (RUB5.2bn at end-2015, all loans from banks) were equal to a small 8% of total assets, meaning only limited refinancing and liquidity risk. Russian state-owned banks accounted for 91% of this funding. RAL's borrowings were all secured, mainly by the company's deposits in banks, but also by lease receivables.
Fitch has downgraded the National Rating to 'AA-(rus)' from 'AA(rus)' to bring it in line with the latest Russian national scale mapping.
RAL's ratings are sensitive to changes in the Russian sovereign's ratings. The two-notch difference between the ratings of RAL and the sovereign may narrow in case of a marked strengthening of its policy role and continuing provision of capital support. Conversely, a diminishing of the company's policy role or a sharp increase in leverage as a result of attraction of market funding could result in a downgrade.
The rating actions are as follows:
Long-Term Foreign Currency IDR: affirmed at 'BB'; Outlook Stable
Short-Term Foreign Currency IDR: affirmed at 'B'
National Long-Term rating: downgraded to 'AA-(rus)' from 'AA(rus)'; Outlook Stable
Support Rating: affirmed at '3'
Support Rating Floor: affirmed at 'BB'
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