ACRA affirms AAA(RU) to JSC VEB-leasing, outlook Stable

The credit rating of JSC VEB-leasing (hereinafter, VEB-leasing, or the Company) is equal to the rating of the supporting institution, State Development Corporation “VEB.RF” (ACRA rating: AAA(RU), outlook Stable; hereinafter, VEB.RF), and is based on very high likelihood of extraordinary support from the supporting institution and, indirectly, from the Russian Government.

The standalone creditworthiness assessment (SCA) of the Company has been upgraded to ‘bb’ on better capital metrics following weak risk profile assessment, and adequate funding and liquidity indicators. The positive one-notch adjustment to the SCA for the Company’s competitive advantage is no longer applicable because this factor has been taken into account in the business profile assessment.

VEB-leasing is a specialized leasing company focused on financial and operational lease services covering air, railroad, water, and motor transport and related equipment. In addition, within the framework of its urban development program, the Company has plans to offer integrated solutions and services to regional and municipal authorities (lease of public transport and various equipment for construction, housing and public utilities, environmental, healthcare and other segments). The Company is directly involved in the implementation of the state policy for development of priority sectors of the national economy because the Company is fully owned and controlled by VEB.RF, a state development institution managed by the Russian Government.

Key rating assessment factors

Very high likelihood of support from VEB.RF and the Russian Government stems from the significant role played by the Company in the strategy of VEB.RF, in particular, in supporting the priority industries of the Russian economy. The Company is deeply integrated into VEB.RF. Moreover, almost all functions of VEB-leasing are expected to be centralized by VEB.RF in the nearest future.

Cross-default provisions contained in some of VEB.RF’s debt obligations are another key factor of support from VEB.RF, according to which a default or dissolution of VEB-leasing constitute an event of default for VEB.RF. ACRA also notes that VEB.RF provided guarantees and suretyships with respect to some leasing projects implemented by the Company. Multiple capital injections provided by VEB.RF in the recent years (for the purposes of creating provisions and maintaining capital adequacy) is a positive factor indicative of the Company’s importance for VEB.RF and the state.

Adequate business profile is underpinned by the Company's strong positions in the leasing market and, in particularly, the vehicle leasing segment. The Company has a unique opportunity to access strategically important segments of the leasing market, as it is involved in transport and manufacturing infrastructure projects managed by VEB.RF. Such involvement also implies the Company's participation in the long-term government programs that provide for subsidies or other preferences from the state. At the same time, the concentration of the Company’s lease portfolio on top 10 customers and on classes of leased property (mostly aircraft and railcars) is relatively high (64% and 78%, respectively).

The capital position assessment has been upgraded to satisfactory on the upgrade of capital adequacy factor up to acceptable (due to reduction of uncovered losses in 2018) amid continued negative capital generation metrics. The averaged capital generation ratio (ACGR) calculated over the last five years has remained negative, which is a consequence of the formation of significant reserves for the "historical" part of the Company's leasing portfolio in 2016–2017. No further capitalization of VEB-leasing is expected, however, any profit generated by the Company will be applied to develop its business.

The risk profile is assessed as weak because of a high share of problem contracts in the Company's lease portfolio: as of January 1, 2019, such share exceeded 15%. However, the share has been declining, which is caused by, among other things, financial rehabilitation measures undertaken by the Company's management. Any asset is deemed by ACRA as problem if it is IFRS 9 Stage 3 asset. ACRA expects the amount of problem assets to decline in 2019. However, ACRA notes that the volume of contracts with payments overdue for 90+ days is low: in late 2018, NPL90+ totaled 0.5% of the current portfolio, while the aggregate amount of contracts with payments overdue for at least one day was 2.2%.

ACRA notes that the Company's funding concentration is high on both key sources and specific lenders. In particular, Company’s securities were the largest funding source as at year-end 2018 (45%), while the top five lenders accounted for around 60% of its liabilities. On the other hand, the high funding concentration is mitigated by the fact that the largest lender and bondholder is VEB.RF.

The Company’s liquidity position is assessed as adequate. In ACRA’s base case scenario (based on the Company’s cash flow projections), the current liquidity indicator of the Company is around 1.1x within the next 12 month. In the stress scenarios of ACRA, emergency needs for liquidity are moderate. As the Company is deeply integrated into VEB.RF and operates through a single treasury, it has access to emergency liquidity from VEB.RF, which ACRA also regards as a positive factor in terms of liquidity management.

ACRA has ceased to apply an upward one-notch adjustment to the Company’s SCA based on its competitive advantage, having included this factor into the business profile assessment.

Key assumptions

  • Implementation of the new business model that includes integration with VEB.RF and the focus on financing the projects implemented by VEB.RF in the priority industries;
  • Long-term preservation of the shareholding control of VEB.RF;
  • Fast business growth in the next two or three years;
  • CAR of at least 8% in the next 12–18 months.

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 negative rating action may be prompted by:

  • A change in the shareholding structure, which may significantly lower the likelihood and/or quality of extraordinary support.

Rating components

No outstanding issues have been rated.

Regulatory disclosure

The credit rating has been assigned under the national scale for the Russian Federation and is 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 assigned to JSC VEB-leasing was published on April 18, 2018. The credit rating 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 the data provided by JSC VEB-leasing, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using IFRS consolidated statements of JSC VEB-leasing and statements of VEB-leasing composed in compliance with RAS. The credit rating is solicited, and JSC VEB-leasing participated in its assignment.

No material discrepancies between the provided data and the data officially disclosed by JSC VEB-leasing in its financial statements have been discovered.

ACRA provided additional services to JSC VEB-leasing. No conflicts of interest were discovered in the course of credit rating assignment.

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