Fitch Ratings-London-16 May 2017: Fitch Ratings has upgraded PJSC State Transport Leasing Company’s (STLC) Long-Term Issuer Default Ratings (IDRs) to ‘BB’ from ‘BB-’. The Outlooks are Stable. A full list of rating actions is at the end of this rating action commentary.

KEY RATING DRIVERS
STLC’s Long-Term IDRs of ‘BB’, Support Rating of ‘3’ and Support Rating Floor (SRF) of ‘BB’ reflect the moderate probability of support, in case of need, the company could receive from the Russian sovereign (BBB-/Stable), its ultimate shareholder. The upgrade of STLC’s Long-Term IDR reflects Fitch’s view that the likelihood of support that the company may receive from the Russian sovereign, represented by the Ministry of Transport of the Russian Federation, has moderately increased.

In particular, in Fitch’s view the sovereign’s propensity to support STLC has increased due to (i) STLC’s increasing role in state programmes to support the transport sector and domestic aircraft and watercraft manufacturing; (ii) a prolonged record of equity injections as evidenced by RUB12.4 billion of equity received in December 2016 and a further RUB2 billion in March 2017 and anticipated further injections; (iii) more moderate growth plans, limiting the potential cost of support; and (iv) deeper integration of the company with the Ministry of Transport.

However, the timing and the amount of support (especially capital) could be constrained by a potentially lengthy and onerous budgetary process (unplanned capital injections would need to be approved as amendments to the federal budget).

STLC was the largest Russian leasing company by volume of new business in 2016 and the fourth-largest by total lease portfolio at end-2016. It has been under the direct oversight of the Ministry of Transport since 2009. STLC’s participation in state programmes for the development of the Russian transportation industry was extended in 2016 to several new programmes.

Existing programmes (the major one is providing lease financing for Russian-built Sukhoi Superjet 100 aircraft) have continued to be carried out, and STLC anticipates receiving further capital injections to support them.

Fitch views STLC’s intrinsic creditworthiness as modest given the company’s asset quality deficiencies, large balance sheet concentrations, considerable exposure to residual value risk and limited liquidity of the company’s assets, only break-even profitability to date and significant, albeit manageable, short-term refinancing needs.

STLC’s lease book is concentrated, which is typical of Russian state-owned leasing companies. At end-2016, the largest exposure (24% of total earning assets) was represented by operating lease contracts with the Russian state-controlled airline, Aeroflot (B+/Stable).

The amount of problem exposures (net investments in lease and other receivables on terminated contracts overdue by 90+ days plus foreclosed assets) declined to a moderate 5% of total earning assets at end-2016 from 8% at end-2015 due to restructuring of the two largest problems.

STLC’s financial leverage (debt/equity) has been comfortable at around 3x since end-2015 due to several equity injections made in 2015-1Q17, which outpaced asset growth. Management expects annual growth of around 20%-30% in 2017-2020, which could increase leverage up to a still reasonable 4x, given the planned equity injections to support this.

During 2017, STLC has to repay RUB37 billion of debt which equalled 21% of total liabilities at end-2016. In addition, STLC aims to attract at least a further RUB47 billion to finance lease commitments. Fitch views these borrowing plans as feasible due to the company’s track record and close ties with Russian state banks. STLC’s available liquidity buffer at end-2016 was RUB9 billion, while proceeds from outstanding lease contracts are expected at RUB37 billion (net of VAT). A further RUB50 billion has subsequently been raised in 2017, including a RUB30 billion syndicated loan arranged by Russian Gazprombank (BB+/Stable) and RUB20 billion domestic bonds issuances.

STLC’s rouble-denominated senior unsecured debt ratings are aligned with the company’s Long-Term Local-Currency IDR. US dollar-denominated notes issued by its Ireland-based subsidiary GTLK Europe DAC are rated in line with STLC’s Foreign-Currency IDR as they benefit from an unconditional and irrevocable guarantee from STLC.

RATING SENSITIVITIES
STLC’s Long-Term IDRs are primarily sensitive to a change in Russia’s sovereign ratings. A weakening of the ability or propensity of the Russian authorities to provide support to STLC could lead to a downward revision of its SRF and downgrade of its Long-Term IDR. In addition, rapid growth leading to a sharp increase in STLC’s leverage beyond Fitch’s current expectations, or significant corporate governance risks, could also be credit-negative.

A further upgrade of STLC’s ratings, although unlikely in the near term, would be primarily contingent on an upgrade of the Russian sovereign rating. In addition, a more significant policy role for STLC with respect to implementation of state programmes to support the Russian transportation sector, underpinned by sufficient capital provided by the authorities, could be positive for the ratings.

STLC’s and GTLK Europe’s senior debt ratings are likely to move in tandem with the company’s Long-Term IDRs.

The rating actions are as follows:

PJSC State Transport Leasing Company
Long-Term Foreign- and Local-Currency IDRs: upgraded to ‘BB’ from ‘BB-’, Outlooks Stable
Short-Term Foreign-Currency IDR: affirmed at ‘B’
Support Rating: affirmed at ‘3’
Support Rating Floor: revised to ‘BB’ from ‘BB-’
Senior unsecured debt rating: upgraded to ‘BB’ from ‘BB-’

GTLK Europe DAC
Guaranteed notes long-term rating: upgraded to ‘BB’ from ‘BB-’