Fitch affirms Eastcomtrans ratings; outlook Stable
June 3. KASE
Fitch Ratings has affirmed the ratings of two Russian autoleasing companies Europlan CJSC and Carcade LLC, including their Long-term Issuer Default Ratings (IDRs) at, respectively, ‘BB’ and ‘BB-‘. The agency has also affirmed Kazakh Eastcomtrans’s (ECT) IDR at ‘B’. The Outlooks on all ratings are Stable. A full list of rating actions is available at the end of this comment.
KEY RATING DRIVERS: Europlan’s and Carcade’s IDRS, NATIONAL LONG-TERM RATINGS
The affirmation of the companies’ IDRs reflects their solid performance, generally low credit losses of the lease books (zero for Europlan and low single digits for Carcade) helped by solid underwriting, a rigorous collection function, strong liquidity positions and increasing funding diversification (somewhat better for Europlan), which mitigates refinancing risk.
Constraining the ratings are a weaker economic outlook, including declining car sales in Russia, and increased pressure on margins due to rising funding costs. There are also intrinsic constraints, such as a rapid build-up of problem loans in the bank start-up subsidiary of Europlan and somewhat alleviated default levels in Carcade, although these are mitigated by foreclosure and sale of collateral.
Europlan and Carcade are the two leading autoleasing companies in Russia with market shares of about 15% and 8%, respectively, at end-2013. Both companies demonstrated strong growth in 2013 of 25% and 42%, while in 1Q14 growth was more muted (around 10% annualised) due to a less benign operating environment. Fitch expects car sales to contract in 2014, driven by a broader weakening of economy, although growing leasing penetration in car sales will help mitigate a downturn for the leasing industry. As a result, we expect growth of lease books this year to be below 15%.
Europlan’s lease book is more diversified with trucks and light commercial vehicles amounting to 44%, followed by passenger car fleet at 38% and the remaining 18% being specialised vehicles and equipment. Carcade is more of a monoliner focusing on passenger cars (70% of total book). Although Fitch assesses commercial vehicles and equipment segments as higher-risk, primarily due to a less liquid secondary market, this has not caused any problems for Europlan so far.
Default origination rates have picked up and are higher for Carcade (13% in 1Q14, 9% in 2013) than Europlan (6%, 3% in respective periods). However, the robust collateral coverage (both companies require a down-payment of around 25%) underpins the recovery process, resulting in small final losses – zero for Europlan and around 2% for Carcade. Asset quality also benefits from low lessee concentration with top 25 lessees not exceeding 8% and 4% of the lease books for Europlan and Carcade, respectively.
For Europlan additional credit risk stems from a recently established (in 2011) banking subsidiary (around 13% of consolidated assets at end-1Q14), which has demonstrated extremely weak asset quality performance (non-performing loans of 8% at end-2013) due to aggressive growth, lack of banking experience and untested underwriting. Positively, high-risk unsecured car loans have been discontinued. However, Fitch estimates that upon seasoning in 2014-2015 its loan book may require additional provisioning of around RUB0.8bn, thus eroding Europlan’s profitability. Carcade also had a banking subsidiary, but sold it to the parent Getin Holding in May 2014.
Profitability is so far reasonable, although there has been increasing pressure on margins due to competitive pressure. Fitch calculates that the risk-adjusted margins (after operating expenses) for Europlan and Carcade contracted, respectively, to 2.8% and 1.2% in 1Q14 from 5.2% and 2% in 2013. Funding costs are likely to increase by about 150bp-200bp in 2014 in line with banking sector trends, so the companies would try to pass this increase on to their clients to preserve profitability, which may be challenging given the increasing competition, especially from state-owned VEB-Leasing (BBB/Negative).
Liquidity profile is strong for both entities, given sizable cash buffers, a fairly diversified funding base with a repayment schedule well-matched by asset amortisation. Also both companies have demonstrated their ability to deleverage if refinancing becomes problematic. However, the downside of such a unwinding scenario would be a reduced franchise and profitability. For Carcade some liquidity support may also come from sister Getin Noble Bank S.A.(BB/Stable/bb).
Capitalisaiton is generally satisfactory, albeit somewhat stronger in Europlan (debt- to-equity (D/E) of 4.8x) compared with Carcade (5.2x) at end-1Q14. Carcade plans dividend payments in 2014-2016, although it targets a D/E ratio of no more than 6.0x.
For Europlan there is uncertainty stemming from the scheduled end of term in December 2014 of the Baring Vostok Private Equity Fund, which owns 60.9% of its shares. Unless the fund’s term is renewed there is a risk of potential change of a controlling shareholder, which may affect the company’s strategy and risk profile.
RATING SENSITIVITIES: Carcade’s and Europlan’s IDRS, NATIONAL LONG-TERM RATINGS
There is currently limited upgrade potential for the ratings, although continued franchise strengthening and maintenance of reasonable leverage will be credit-positive. For Europlan an upgrade would also be contingent on an improvement of the banking subsidiary’s asset quality.
A significant increase in leverage, material credit losses exerting pressure on performance and capitalisation could be negative for the ratings.
KEY RATING DRIVERS: ECT’s LONG-TERM IDR
The affirmation of ECT’s ratings reflects limited changes in the credit profile over the past 12 months; a fairly narrow franchise, high concentration risk and some credit risk stemming from a high share of dollar-denominated/linked contracts. Positively, the ratings also reflect generally strong financial metrics, stable cash generation and moderate liquidity risk with so far comfortable headroom over its main debt covenants.
The growth of ECT’s fleet moderated to 14% in 2013 from 25% in 2012, but it retains a strong position in the Kazakh rolling stock market, as the largest private fleet owner with 11,184 cars at end-2013. ECT’s fleet is fairly young (about four years) and dominated by oil tanker cars (54% of total fleet at end-2013). While ECT has a solid position in Kazakhstan, it remains small in the context of the wider CIS market.
ECT’s fleet utilisation ratio is close to 100% despite the currently weak market dynamics and an increase in tenge terms of dollar-linked rental rates after the local currency depreciated by 19% in 1Q14. ECT’s client base concentration remains high with the largest client, Tengizchevroil LLP (TCO, secured notes rated BBB+/Stable), accounting for around 62% of the company’s 2013 revenues or 52% of total wagons leased. Therefore any potential decrease by TCO of rail transportation in favour of the pipeline could be detrimental to ECT’s cash flows unless it promptly finds a replacement.
Profitability remains solid with EBITDA margin at 85% and ROAE close to 21% in 2013. However, Fitch expects profitability to moderate somewhat in mid to long-term, as rent rates on new or renewed contracts would decrease to average market levels, while funding costs of predominantly foreign-currency debt are likely to remain flat.
Leverage is fairly low with debt/EBITDA of 2.6x and debt/equity of 1.3x at end-2013. However, ECT has not revalued its fleet since 2010, while the wagons acquired in 2011-2012 were bought at a rather high price. Fitch estimates that based on CIS average wagon prices the book value of assets is about 10% above the market value. However, this is not a big risk, as it would require at least a 34% negative devaluation of assets to cause a breach of the eurobond covenant of minimum total equity of USD90m.
ECT’s EBITDA comfortably covers debt service (interest and principal payments) by about 1.6x. Also, ECT lengthened its funding structure by placing a USD100m eurbond in 1H13 and using USD65m of the proceeds to refinance short-term bank loans, although now there is a spike in 2018 when the eurobond is due.
RATING SENSITIVITIES: ECT’s LONG-TERM IDR
A greater franchise diversification in conjunction with an extended track record of solid performance, comfortable leverage and adequate liquidity, could create upside for the ratings.
A considerable decline of utilisation, a shrinking revenue base or an acquisition of another leasing company or portfolio resulting in weaker credit metrics would be negative for the ratings.
KEY RATING DRIVERS AND SENSITIVITIES: ECT’s SENIOR DEBT RATING
The senior debt rating for the USD100m notes due 2018 is aligned with the company’s IDR, among other factors reflecting the Recovery Rating soft-cap of ‘RR4’ for countries, including Kazakhstan, that are included in Group D as per Fitch’s ‘Country Specific Treatment of Recovery Ratings’ criteria.
List of rating actions:
Long-term foreign and local currency IDR affirmed at to ‘BB’; Outlook Stable
Short-term foreign-currency IDR affirmed at ‘B’
National Long Term Rating affirmed at ‘AA-(rus)’; Outlook Stable
Senior unsecured debt: affirmed at ‘BB’
Senior unsecured debt National rating: affirmed at ‘AA-(rus)’
Long-term foreign and local currency IDR: affirmed at ‘BB-‘; Stable Outlook
Short-term IDR: affirmed at ‘B’
Long-term National Rating: affirmed at ‘A+(rus)’; Stable Outlook
Senior unsecured debt: affirmed at ‘BB-‘
Senior unsecured debt National rating: affirmed at ‘A+(rus)’
Long-term foreign and local currency IDRs affirmed at ‘B’; Outlook Stable
National Long-term Rating affirmed at ‘BB(kaz)’; Outlook Stable
Senior secured rating affirmed at ‘B’, Recovery Rating at ‘RR4’.