ACRA downgrades “TransFin-M” PC to BBB(RU), changes outlook to Positive, and downgrades its bond issues to BBB(RU)

The credit rating of “TransFin-M” PC (hereinafter, TransFin-M, or the Company) has been downgraded in view of the non-state pension fund “BLAGOSOSTOYANIE”, which was previously regarded as the supporting organization of TransFin-M, withdrawing from shareholding in the Company. Therefore, the three notches of support to the standalone creditworthiness assessment (SCA) are no longer applicable. At the same time, the SCA is upgraded by one notch up to bbb following improvement in the lease portfolio quality and the lower business profile assessment.

The outlook was changed from Developing to Positive in view of the finalized sale of TrasFin-M to JSC TFM-Garant as well as probable substantial strengthening of the Company’s market position in the next 12 to 18 months driven by expansion of the rolling stock in operation.

The credit ratings of the Company’s bond issues representing its senior unsecured debt have been downgraded to the issuer’s credit rating of BBB(RU). ACRA may revise the credit rating of the bond issues after receiving the Company’s financial reporting for 2019.

TransFin-M is a specialized leasing company focused on financial leasing in transportation means, mainly rolling stock. The Company is among the largest Russian leasing companies in terms of lease portfolio. In October 2019, non-state pension fund “BLAGOSOSTOYANIE” sold the Company to JSC TFM-Garant, whose shareholders include Alexey Taycher (70% stake) and top managers of TransFin-M who control the rest of 30% in equal stakes.

Key rating assessment factors

The business profile assessment was changed to satisfactory in view of the significant changes in the Company’s management and an element of uncertainty regarding its future development. At the same time, TransFin-M remains among the top leasing companies, a leader in the railcar leasing market, and a major rolling stock operator, acting through a range of its affiliates (the concentration of the Company’s lease portfolio on rolling stock remains high at 80%) whose market positions may strengthen significantly as a result of the rolling stock expansion. ACRA also notes the poor diversification of the lease portfolio by customer, as the share of the top ten lessees is 84%. The majority of customers, which account for about 70% of the lease portfolio, are affiliated with the Company or its former shareholder. At the same time, the ultimate asset structure is more diversified, as the majority of clients make subleasing (leasing) transactions with a wide range of counterparties in the market.

The Company’s comfortable loss absorption buffer is coupled with adequate internal capital generation capacity. The Company’s capital cushion is sizable; in the first six months of 2019, the capital adequacy ratio (CAR) increased to 27.6% from 17.4% due to RUB 8.7 bln of net income generated, including one-off revenues from the sale of railway cars (RUB 6 bln) and an advantageous business acquisition (RUB 4.4 bln). ACRA assesses the Company’s ability to generate capital as adequate; the averaged capital generation ratio (ACGR) for 2014-2018 amounted to approximately 110 bps. No dividend payments are expected for 2019, and the Company plans to use net income to repay obligations and lower the debt load.

The improved lease portfolio quality is driven primarily by the reduction of problem and potentially problem debt in the portfolio from 5.9% to below 5% (considering the sale of a substantial part thereof in Q4 2019).

The Company’s funding structure remains highly concentrated in terms of sources and lenders. As of June 30, 2019, the Company’s main source of funding was debt securities (43% of liabilities), a significant part of which was held in the portfolios of BLAGOSOSTOYANIE affiliates, while raised loans accounted for another 22%.
The funding structure at the Company level has not changed significantly following the sale of the Company. At the same time, given the debt load of the parent company, bank loans are currently the primary source of funding, with the largest creditor accounting for about 40% of liabilities.

Satisfactory liquidity position. Considering that the bank loan was secured by pledge of the Company's assets, the amount of available unencumbered assets that can be used to raise additional liquidity has decreased significantly. However, the loan’s repayment schedule assumes a three-year grace period, provided that the covenants are complied with. In addition, the loan has reduced the cost of funding. The Company has satisfactory cash reserves at the end of each quarter over the next 1-2 years in ACRA’s base case scenario, as the forecasted ratio of current liquidity averages 1.02. In ACRA’s stress scenario, the need to raise emergency liquidity is elevated, but can be fully covered with available sources.

Key assumptions

  • Maintaining the current business model within the 12 to 18-month horizon;
  • CAR above 15% within the 12 to 18-month horizon;
  • Annual growth rate of the lease portfolio within 10%.

Potential outlook or rating change factors

The Positive outlook assumes that the rating will most likely change within the 12 to 18-month horizon.

A positive rating action may be prompted by:

  • Strengthened market positions;
  • Higher capital generation while maintaining high CAR;
  • Considerable increase in the diversification of the funding structure;
  • Pronounced improvement in the liquidity position.

A negative rating action may be prompted by:

  • Lower capital generation in the case of dividend payments and/or substantial decrease in CAR due to active business expansion, increase in the cost of risk, or M&A deals;
  • Deterioration of lease portfolio quality;
  • Significant deterioration of liquidity position.

Rating components

SCA: bbb.

Adjustments: none.

Support: none.

Issue ratings

“TransFin-M” PC, 001P-02-боб series (RU000A0JXK99), maturity date: February 22, 2027, issue volume: RUB 5 bln — BBB(RU).

“TransFin-M” PC, 001P-03-боб series (RU000A0JXVB1), maturity date: June 28, 2027, issue volume: RUB 500 mln — BBB(RU).

“TransFin-M” PC, 001Р-04 series (RU000A0ZYEB1), maturity date: October 14, 2027, issue volume: RUB 10 bln — BBB(RU).

“TransFin-M” PC, 001P-05 series (RU000A0ZYFS2), maturity date: November 3, 2027, issue volume: RUB 600 mln — BBB(RU).

“TransFin-M” PC 001P-06 series (RU000A100TS6), maturity date: September 3, 2029, issue volume: RUB 5 bln — BBB(RU).

Rationale. The bonds listed above represent senior unsecured debt of “TransFin-M” PC. Due to the absence of either structural or contractual subordination of the bonds, ACRA ranks the bonds pari passu with other existing and future unsecured and unsubordinated debt obligations of the Company. According to ACRA’s methodology, the reimbursement rate for unsecured debt is categorized as category II. Therefore, the bond issues are assigned the credit rating of BBB(RU), i.e. on par with “TransFin-M” PC.

Regulatory disclosure

The credit ratings were assigned to “TransFin-M” PC and bonds (RU000A0JXK99, RU000A0JXVB1, RU000A0ZYEB1, RU000A0ZYFS2, RU000A100TS6) issued by “TransFin-M” PC 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. To assign a credit rating to the above bond issues, the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation was also applied.

The credit ratings assigned to “TransFin-M” PC and bonds (RU000A0JXK99, RU000A0JXVB1, RU000A0ZYEB1, RU000A0ZYFS2, RU000A100TS6) issued by “TransFin-M” PC were first published by ACRA on August 2, 2017, August 23, 2017, August 23, 2017, November 14, 2017, February 20, 2018, and September 16, 2019, respectively. The credit rating of “TransFin-M” PC and its outlook and the credit ratings assigned to bonds (RU000A0JXK99, RU000A0JXVB1, RU000A0ZYEB1, RU000A0ZYFS2, RU000A100TS6) issued by “TransFin-M” PC are expected to be revised within one year following the publication date of this press release.

The assigned credit ratings are based on the data provided by “TransFin-M” PC, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using IFRS consolidated statements of “TransFin-M” PC and statements of “TransFin-M” PC composed in compliance with RAS. The credit ratings are solicited, and “TransFin-M” PC participated in its assignment.

No material discrepancies between the provided data and the data officially disclosed by “TransFin-M” PC in its financial statements have been discovered.

ACRA provided additional services to “TransFin-M” PC. No conflicts of interest were discovered in the course of credit rating assignment.

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