Training on sovereign risk credit analysis, October 24

ACRA affirms A-(RU) to “SOLLERS-FINANCE”, LLC, outlook Stable, and assigns A-(RU) to its bond issue (RU000A0ZZZN8)

The credit rating of “SOLLERS-FINANCE”, LLC (hereinafter, SOLLERS FINANCE, or the Company) is based on an adequate business profile and capital adequacy assessment, strong risk profile, satisfactory funding and liquidity assessment, as well as support from shareholders, primarily from PJSC Sovcombank. The Company has a moderately high creditworthiness as compared to other issuers in the Russian Federation.

“SOLLERS-FINANCE”, LLC is a Russian leasing company with a primary specialization in providing financial lease services with respect to motor vehicles: cargo and passenger vehicles, buses, and minibuses. PJSC Sovcombank (A(RU), outlook Stable) and PJSC “SOLLERS” own the Company on a parity basis.

Key rating assessment factors

The adequate business profile assessment is based on the Company’s strong position among medium-size leasing companies specializing in the financial lease of motor vehicles, primarily in the cargo segment. Liquidity of vehicles in this segment is assessed as high, which allows the Company to be flexible in responding to the worsening economic environment.

The Company’s development strategy involves business expansion in its key segments, which are primarily in leasing cargo vehicles, buses and minibuses. The Company’s further development involves cooperation with the automotive lending business of PJCS Sovcombank. The Company’s corporate governance and risk management system are assessed as adequate in the context of its size and the business niche that it occupies.

The Company’s capital adequacy is assessed as strong and is supported by its profitable operations over a number of years. As of the end of September 2018, the capital adequacy ratio (CAR) stood at around 22%. ACRA expects the averaged capital generation ratio (ACGR) to equal 282 bps at the end 2018. Capital adequacy levels allow the Company to absorb potential losses if overdue loans in the leasing portfolio increase substantially following a substantial decline in the economy.

The Company’s risk profile is assessed as adequate. The share of lease contracts with payments overdue for more than 90 days is 0.3% of the total portfolio. There is a proven and tested method for direct debit of payments, if necessary, with respect to lease contracts with lessees of low credit quality (as defined in ACRA’s methodology). The Agency also points to the high liquidity of automotive equipment, control over, and allowed prompt seizure of, leased items as well as the established process for selling vehicles in case of lease contract termination.

The Company strategy assumes the rapid growth of the aggregate leasing portfolio; therefore, within the 1 to 2-year horizon, any possible growth of overdue debt would have no effect on the risk profile. In addition, the Company’s leasing portfolio of would primarily grow in the automotive equipment lease segment, which would allow the Company to maintain the high liquidity of equipment. However, over longer periods, the Company’s ability to maintain a low share of overdue lease payments would depend on risk management quality.

Low diversification of the funding structure coupled with adequate liquidity position. Current funding structure in terms of sources is assessed as highly concentrated as debt securities currently provide the bulk of funding. As of January 1, 2018, the Company’s bond issue accounted for 48% of liabilities, while bank financing accounted for 24.2%. According to ACRA’s estimates based on the Company’s strategy analysis, bonds would continue dominating the funding structure in the next 12-18 months.

The liquidity management policy of SOLLERS FINANCE incorporates its business specifics, which requires no significant cushion of high-liquid assets to be maintained in view of the high liquidity of leased equipment and highly diversified leasing portfolio in terms of clients. The liquidity management policy is based on a potentially fast reduction of new lease sales in case of a projected liquidity deficit. In addition, the Company maintains credit lines from several large Russian banks, which also represent an additional liquidity source in the base case scenario.

Limited likelihood of extraordinary support from the parent entity. In ACRA’s opinion, PJSC Sovcombank, one of the Company’s two shareholders, can act as a Supporting Institution capable of providing the Company with both short-term and long-term financing (liquidity as may be required) and of making capital injections based on the following factors:

  • Availability of significant legal and operational interrelations between PJSC Sovcombank and the Company;
  • The Company is regarded as a member of the PJSC Sovcombank group in its development for automotive lending and leasing.

The rating assigned by ACRA to PJSC Sovcombank is A(RU), outlook Stable. The level of connection between the Supporting Institution and the Company is assessed by ACRA as moderate. ACRA therefore added one notch to the Company’s SCA.

Key assumptions

  • Maintaining the accepted business model of the Company within the 12 to 18-month horizon;
  • Capital adequacy ratio (CAR) no less than 16.7% within the 12 to 18-month horizon;
  • Share of leasing contracts with overdue payments below 5%.

Potential outlook or rating change factors

The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.

A positive rating action may be prompted by:

  • Successful implementation of the strategy to increase the market share, while retaining sustainable business profitability and a low share of overdue lease payments;
  • Increased diversification in the funding structure;
  • Further integration of the Company into the activities of PJSC Sovcombank group, which could motivate an increase in the shareholder support assessment.

A negative rating action may be prompted by:

  • Lower willingness of shareholders to support the Company, or a substantial decline in the creditworthiness of the Supporting Institution;
  • Substantial CAR decrease due to the active business growth of the Company or an increase in the cost of risk;
  • Significant deterioration in the quality of the leasing portfolio;
  • Substantially worse liquidity position.

Rating components

Standalone creditworthiness assessment (SCA): bbb+.

Adjustments: no.

Support: +1 notch.

Issue ratings

Rationale. The bellow issue represents senior unsecured debt of SOLLERS FINANCE. Due to the absence of either structural or contractual subordination of the issue, ACRA regards it as equal to other existing and future unsecured and unsubordinated debt obligations of the Company in terms of priority. According to ACRA’s methodology, the reimbursement rate for unsecured debt is classified into to category I; hence, the credit rating of the issues is equivalent to that of “SOLLERS-FINANCE”, LLC, i.e. A-(RU).

Key issue properties

Borrower

“SOLLERS-FINANCE”, LLC

Issuer’s credit rating

A-(RU), outlook Stable

Actual issuer

“SOLLERS-FINANCE”, LLC

Type of security

Certified exchange-traded interest-bearing unregistered bond,
001P-01 series

Issue volume

RUB 3 bln

ISIN

RU000A0ZZZN8

Placement start date

January 11, 2019

Maturity date

December 21, 2021

Regulatory disclosure

The credit ratings of “SOLLERS-FINANCE”, LLC and the bonds issued by “SOLLERS-FINANCE” (ISIN RU000A0ZZZN8) have been assigned under the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Leasing Companies Under the National Scale for the Russian Federation and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities. In the course of assigning credit rating to the bond issue above, the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation has also been used.

The credit rating assigned to “SOLLERS-FINANCE”, LLC was published by ACRA for the first time on December 27, 2017. The credit rating and credit rating outlook are expected to be revised within one year following the rating action (December 25, 2018).

A credit rating has been assigned to the 001P-01 series bond of “SOLLERS-FINANCE”, LLC for the first time. The credit rating is expected to be revised within one year following the rating action date (December 25, 2018).

The assigned credit rating is based on the data provided by «SOLLERS-FINANCE», LLC, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using IFRS consolidated statements of «SOLLERS-FINANCE», LLC and statements of «SOLLERS-FINANCE», LLC composed in compliance with RAS. The credit rating is solicited, and «SOLLERS-FINANCE», LLC participated in its assignment.

No material discrepancies between the provided data and the data officially disclosed by «SOLLERS-FINANCE», LLC in its financial statements have been discovered.

ACRA provided no additional services to «SOLLERS-FINANCE», LLC. No conflicts of interest were discovered in the course of credit rating assignment.

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