Fitch Rates JSC Hydromashservice's 2020 Bonds 'B+(EXP)'


10 Feb 2017 4:07 AM


Fitch Ratings-Frankfurt/London-10 February 2017: Fitch Ratings has assigned JSC Hydromashservice's, a wholly-owned subsidiary of JSC HMS Group (B+/Stable), prospective RUB3bn guaranteed bonds due to mature in 2020, an expected local currency senior unsecured rating of 'B+(EXP)'/'RR4'. The ratings on the bond reflect the role of Hydromashservice as a principal subsidiary of JSC HMS, and the cross guarantees for debt in the group.

The Recovery Rating is limited to 'RR4' as the company's principal operations are in Russia. The assignment of the final rating is contingent on the receipt of final documents conforming to information already received.

The ratings reflect HMS's weak business profile, with high geographic concentration and high exposure to investment levels in the Russian oil and gas (O&G) sectors. The ratings are further limited by Fitch's expectation of negative free cash flow (FCF) for the foreseeable future, due to higher capex and continued dividend outflow. 

KEY RATING DRIVERS

High Concentration in Russia: HMS is a market leader in Russia (BBB-/Stable) in two of its three main business segments - pumps (42% market share), and O&G equipment (30%). The company supplies equipment to all major Russian O&G companies including Rosneft, Gazprom (BBB-/Stable), Gazprom Neft (BBB-/Stable), Transneft and Lukoil (BBB-/Stable). HMS also has over 5,000 small and medium-sized clients that together generate about 75% of its revenues from standard pumps and compressors, which is the company's sustainable recurring business. The remaining 25% is generated by large tailor-made integrated products.

Oil Production Resilience Expected: Fitch's base case assumes that Russia's high production will be maintained despite price fluctuations and that Russia will remain a key global exporter of crude and oil products. Continued high production volumes underpin Fitch's expectations for continued pump and compressor sales to replace existing, fully depreciated units. Russia's oil production is at a record high despite western sectoral and financial sanctions. It averaged 11.2 million barrels of oil equivalent per day in October 2016, a post-Soviet record, mainly supported by ramping up greenfield output. 

Share of Aftermarket Services Low: HMS's aftermarket maintenance services, which typically provide a stable income source in a cyclical downturn, contribute a low proportion of revenues. This is because customers usually have their own maintenance service divisions and aftermarket revenues mainly come from selling spare parts.

Compressor Business More Volatile: Fitch does not expect the higher volatility of compressor sales to have a major effect on the ratings, due to the modest contribution of this segment to the company's revenues. The company expects the share of large products in the compressor segment to drive growth. Fitch expects the volatility of this business to remain high due to a large exposure to large contracts. 

No FX Exposure: HMS is not exposed to exchange rate risk, as virtually all its debt, revenues and costs are denominated in Russian rouble. However, the company's operations are geographically concentrated, with the majority of its products sold in Russia.

DERIVATION SUMMARY

HMS's 'B+' IDR reflects the company's concentrated geographic and industry exposure and our expectation that the company will remain FCF-negative for the foreseeable future. This is offset, in Fitch's view, by its leading market position in a niche sector with high barriers to entry, a strong customer base largely consisting of major Russian O&G companies, a recurring business and healthy profitability and leverage metrics. We view the company's liquidity position as adequate.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Moderate revenue growth not exceeding 5% for all segments over 2017-2020;
- EBITDA margin below historical levels, capped at 14%; 
- Capex in line with the company's guidance (about 5% of revenues);
- Dividend pay-out ratio at 60% of prior-year net income.

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to positive rating action:
- Sustained positive FCF generation;
- FFO-adjusted net leverage sustained below 2.5x (2016E: 3.1x);
- FFO fixed-charge coverage sustained above 3.5x (2016E: 2.4x).

Future developments that may, individually or collectively, lead to negative rating action:
- Continuous failure to secure large integrated projects from major Russian O&G companies;
- FFO-adjusted net leverage sustained above 3.5x;
- FFO fixed-charge coverage sustained below 2.0x.

LIQUIDITY

Adequate Liquidity: As of 1 October 2016, HMS had reported cash and short-term deposits of RUB3 billion on its balance sheet against short-term debt of RUB3.2 billion. Almost all the cash is held in Russian rouble, with only 4% in Ukrainian hryvnia and Belarusian roubles for use by local subsidiaries. Over 99% of the debt is held in Russian rouble. HMS also had RUB10 billion in available undrawn credit lines from major Russian banks.

As of 1 October 2016, RUB10.3 billion maturities peaked within 2017-2018. The prospective bond RUB3 billion bond issuance in 2017 and the ongoing negotiation of loan extension will help spread HMS's maturities more evenly. We conservatively forecast that FCF will be negative over the next three years due to high capex and dividends. However, we do not expect the company will have difficulties refinancing over the medium term.

Contact:

Principal Analyst
Alexey Evstratenkov
Analyst
+44 203 530 1089

Supervisory Analyst
Dr Georgy Kharlamov
Director
+49 69 768076 263
Fitch Deutschland GmbH
Neue Mainzer strasse 46-50
60311 Frankfurt am Main

Committee Chairperson
Paul Lund
Senior Director
+44 203 530 1244

Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: julia.belskayavontell@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com.

Summary of Financial Statement Adjustments
Operating leases: operating lease expenses were capitalised using a multiple of 6x times as the company is based in Russia.

Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary.

Applicable Criteria
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)

Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
Solicitation Status
Endorsement Policy


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