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

The credit rating of “SOLLERS-FINANCE”, LLC (hereinafter, SOLLERS FINANCE, or the Company) is based on its adequate business profile, strong capital adequacy assessment, adequate risk profile, satisfactory funding and liquidity assessment, as well as support from shareholders, primarily from PJSC Sovcombank.

“SOLLERS-FINANCE”, LLC is a Russian financial leasing company focused primarily on motor vehicles, mostly trucks. 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-sized financial leasing companies operating primarily in the truck 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. This, coupled with a low concentration on lessees, ensures the stability of the Company's business.

The quality of corporate governance and risk management is assessed as adequate, which is evidenced by Company's relatively low credit losses and persistently high business profitability. According to Company's IFRS financial statements for 2016–H1 2019, the average return on equity and return on assets amounted to about 40% and 10%, respectively. On the other hand, it should be noted that the Company's credit risk management function focuses on collateral's estimated value and liquidity rather than on the credit analysis of lessees. In our view, such approach may push up the credit portfolio risk in case of a significant decrease in the value of leased assets.

Company’s capital adequacy is assessed as strong and is supported by historically high margins. As of the end of H1 2019, the capital adequacy ratio (CAR) stood at 22.5% and the 5-year average capital generation ratio (ACGR) equaled to 296 bps. In the next 18 months, we do not expect the Company's profitability and capital metrics to vary significantly. The financial result of the Company heavily depends on interest income and, in our opinion, is highly predictable.

The risk profile assessment has been downgraded from strong to adequate. According to our estimates, the share of potentially problem lease assets is 5–10% of the portfolio. However, negative effects from possible materialization of credit risks are somewhat mitigated by highly liquid collateral and efficient enforcement procedures.

The low funding diversification coupled with the adequate liquidity position. The Company's funding concentration is assessed as high. The main source of finances for its operating activities is debt securities amounting to about three quarters of the total liabilities of the Company. Another 10–15% are loans granted by banks, about half of which is from nonaffiliated creditors and the rest is from PJSC Sovcombank. In our view, the low diversification of liabilities is somewhat offset by Company's strong ties with the supporting banking group.

The Company's liquidity management policy matches its business specifics that requires no significant cushion of high-liquid assets due to the high liquidity of leased vehicles and the high diversification of leasing portfolio by lessee. Such approach implies potential for the fast reduction in lease sales in case of liquidity shortage. In addition, the Company maintains a substantial amount of credit lines with PJSC Sovcombank, which is an additional liquidity source that mitigates risks in the stress scenario.

The moderate likelihood of extraordinary support from the parent entity. In ACRA’s opinion, in case of need, PJSC Sovcombank may act as a supporting institution. Taking into account the long history of strong connections and the steady degree of integration between the Company and PJSC Sovcombank (in particular in providing the current assistance to SOLLERS-FINANCE in the form of funding and liquidity), we now apply two notches of support, instead of one. In our opinion, the supporting institution is able to provide the Company with both short-term and long-term liquidity and make capital injections, in view of the following:

  • Close legal and operational interrelations between PJSC Sovcombank and the Company;
  • The Company is regarded as part of PJSC Sovcombank's group responsible for automotive rental and lease operations.

ACRA rates PJSC Sovcombank at A+(RU), outlook Stable. The tightness of relations between the Supporting Institution and the Company is assessed by ACRA as moderate.

Key assumptions

  • The current business model of the Company to remain unchanged in the next 18 months;
  • Capital adequacy ratio (CAR) no less than 15% within the 12 to 18-month horizon;
  • Likelihood of extraordinary support from PJSC Sovcombank.

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:

  • An increase in the creditworthiness of the Supporting Institution simultaneously with the improvement in the credit quality of the lease portfolio.

A negative rating action may be prompted by:

  • Lower willingness of the shareholders to support the Company, or a decline in the creditworthiness of the Supporting Institution;
  • CAR going below 15% due to an active growth of Company's business or substantial credit losses;
  • The share of non-performing lease contracts in the total portfolio going above 10%.

Rating components

Standalone creditworthiness assessment (SCA): bbb.

Adjustments: no.

Support: +2 notches to SCA.

Issue ratings

Bond issued by "SOLLERS FINANCE", LLC, 001P-01 series (RU000A0ZZZN8), maturity date: December 21, 2021, issue volume: RUB 3 bln, — А-(RU).

Rationale. The issue is a senior unsecured debt instrument 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 recovery rate for unsecured debt belongs to category I; hence, the credit rating of the issue is equivalent to that of “SOLLERS-FINANCE”, LLC, i.e. A-(RU).

Regulatory disclosure

The credit ratings of “SOLLERS-FINANCE”, LLC and the bond issued by “SOLLERS-FINANCE” (ISIN RU000A0ZZZN8) were 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, 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. 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 was also used.

The credit ratings assigned to “SOLLERS-FINANCE”, LLC and the bond issued by “SOLLERS-FINANCE” (ISIN RU000A0ZZZN8) were published by ACRA for the first time on December 27, 2017 and December 25, 2018, respectively. The credit rating and credit rating outlook of “SOLLERS-FINANCE”, LLC and the credit rating of the bond issued by “SOLLERS-FINANCE” (ISIN RU000A0ZZZN8) are expected to be revised within one year following the publication date of this press release.

The credit ratings are 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 ratings are solicited, and "SOLLERS-FINANCE", LLC participated in their 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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