Forecasting in credit analysis, May 14–15

ACRA affirms A(RU) to Alfa-Leasing Ltd., outlook Stable

The credit rating of Alfa-Leasing Ltd. (hereinafter, Alfa-Leasing, or the Company) is based on its moderate standalone creditworthiness assessment (SCA) and high probability of extraordinary support from JSC “ALFA-BANK” (ACRA rating: АА(RU), outlook Stable; hereinafter, the Supporting Institution, or the SI). The Supporting Institution is the principal entity of Alfa Bank Group (hereinafter, the Group).

Alfa-Leasing is a universal leasing company working with large corporate clients and SMEs as well as developing operational lease services. The Company leases mainly railroad engineering equipment and motor vehicles, as well as special engineering equipment, river and sea crafts, and tools. Alfa-Leasing operates in seven federal districts of Russia (with dominant presence in Moscow and St. Petersburg). JSC “ALFA-BANK” is the sole shareholder of the Company.

Key rating assessment factors

Adequate business profile assessment of Alfa-Leasing is driven by a well-recognized brand of the Company and proactive strengthening of its position in the lease services market. The lease portfolio concentration on the largest clients (top ten groups of clients account for nearly two-thirds of the portfolio) and leased items (the share of railroad engineering equipment is 62% of net lease investments) is fairly high; at the same time, the liquidity of leased items is assessed as overall medium, according to the ACRA methodology. Transactions with affiliates booked in the asset side of the balance sheet a minimal.  Quality of corporate governance and risk management system are assessed as adequate.

Adequate capital position is based on a moderate loss absorption cushion of the Company considering an acceptable capital adequacy ratio (CAR) of 10.1% and fairly high capacity of Alfa-Leasing to generate capital without external injections (the averaged capital generation ratio (ACGR) totaled around 190 bps for the last five years). At the same time, in view of an active business growth, the Company’s CAR may decrease in the near future.

Adequate risk profile assessment is primarily due to an acceptable level of potentially problem loans in the lease portfolio, according to the ACRA methodology (it totaled nearly 5% of the portfolio as at December 31, 2018, based on the analysis of the 30 largest groups of leaseholders and taking into account transactions restructured into loans). At the same time, ACRA points to high concentration (25%) of the leasing portfolio on the largest group of leaseholders, which entails additional risks in case of a deterioration in their financial standing. Alfa-Leasing has no investments into securities and non-core assets in its balance sheet.

Comfortable liquidity position stems from an acceptable projected current liquidity ratio on the 12-month horizon of around 1.05 in ACRA’s base case scenario (in view of the Company’s plans to develop leasing business), as well as from the Company’s low needs in emergency liquidity as demonstrated in ACRA stress scenarios and no strong needs in refinancing current liabilities in the next 24 months. At the same time, ACRA points to some deterioration in the Company’s liquidity position within the next 12-month horizon due to lower interest income because of macroeconomic factors and funding becoming more expensive since it had been raised at third-party banks.

Significant concentration of the resource base (87% of liabilities) on the SI, which is typical of most subsidiaries that perform specific functions of a parent’s division. The bulk of the Company’s liabilities are bank loans; however, the funding profile may change in the future because of the Company’s business development.

High likelihood of extraordinary support from the parent company. In ACRA’s opinion, the SI is interested in developing the Company’s business and is willing to provide it with sufficient long-term and short-term financing, if needed, taking into account the following:

  • Legal affiliation (a 100% stake of the SI in Alfa-Leasing);
  • The Group doing its leasing business through the Company;
  • Substantial operational integration between the Company and the SI, including at corporate governance and risk management levels;
  • Substantial financing provided by the SI;
  • Potentially high reputation risks for the Group in case of the Company’s bankruptcy.

In view of the strong assessment of the Supporting Institution’s category and the degree of affiliation with the SI, we add four notches up to the Company’s SCA.

Key assumptions

  • Maintenance of the Company’s business model within the 12 to 18-month horizon;
  • High rates of new business growth in 2019-2020;
  • CAR of at least 8% within the 12 to 18-month horizon.

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:

  • Significant growth of capital adequacy both thanks to its generation by the Bank and an increase by the SI;
  • Higher industry diversification of the lease portfolio and its lower concentration on the largest groups of leaseholders;
  • Substantial decline in the share of the largest creditor in the resource base.

A negative rating action may be prompted by:

  • Lower capital adequacy or/and ACGR;
  • Continued deterioration in the Company’s liquidity position;
  • Deterioration of the lease portfolio quality;
  • Substantial deterioration in financial standing of the SI, or the Company’s affiliates.

Rating components

SCA: bbb-.

Adjustments: none.

Support: group support, SCA plus four notches.

Issue ratings

No outstanding issues have been rated.

Regulatory disclosure

The credit rating has 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, the Methodology for Analyzing Member Company Relationships Within Corporate Groups, and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities.

For the first time, the credit rating of Alfa-Leasing Ltd. was published by ACRA on April 18, 2018. The credit rating of Alfa-Leasing Ltd. and its outlook are expected to be revised within one year following the publication date of this press release.

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

No material discrepancies between the provided data and data officially disclosed by Alfa-Leasing Ltd. in its financial statements have been discovered.

ACRA provided no additional services to Alfa-Leasing Ltd. No conflicts of interest were discovered in the course of credit rating assignment.

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