Training on sovereign risk credit analysis, October 24

ACRA affirms A+(RU) to KAMAZ PTC, outlook Stable, and affirms ratings on corporate bonds

The credit rating assigned to KAMAZ PTC (hereinafter, KAMAZ, or the Company) is based on high systemic importance of the Company for the Russian economy and high level of state influence according to the ACRA methodology. In addition, the Company enjoys a strong position in the market, has high-quality corporate governance, strong geographic diversification, strong liquidity assessments, and medium assessments of business profile, size, profitability, leverage and coverage. The credit rating is under pressure from the weak cash flow resulting from the peak of investment cycle that the Company is currently in.

KAMAZ is a leader in the Russian heavy-duty truck market. The share of KAMAZ in the truck segment of 14-40 tons load capacity was 41% in 2018, including 61% market share in the chassis and custom vehicles market, 47% in dump trucks, 72% in high-sided trucks, and 23% in tractor units (including 19% in the long-haul tractors).

Key rating assessment factors

Systemic importance of KAMAZ and state’s influence on the Company are assessed as high. The Company is a key player in the Russian truck market that is of strategic importance for the state in terms of ensuring transportation security. In addition, the car industry demonstrates one of the highest multiplier effects: one job in this sector creates ten or more jobs in related industries. KAMAZ is a backbone enterprise in its location. The Company is a consistent recipient of very strong direct support from the government in form of concessionary loans, property tax benefits, co-financing of research and development, state guarantees for loans and bond issues, subordination of interest rate on investment loans, subsidies to support domestic producers compliant with industrial assembly criterion, subsidies for partial reimbursement of export transportation costs, concessional financing of export contracts, etc.

Medium assessments of leverage and coverage. In 2018, the total debt of the Company has grown significantly on the higher volume of lease portfolio, consolidation of liabilities of Group OAT (which was acquired by the Company in February 2018) on the balance sheet of the Company, and the planned peak of capital expenditures. The weighted-average ratio of the Company’s total debt to FFO before net interest payments will be 6.3x in 2016-2021, according to ACRA's estimates. Very high value of this indicator is offset in leverage assessment by very high quality of the debt (with very duration, as over 40% of the debt is to be repaid after 2022) and availability of state guarantees with respect to a substantial amount of the debt portfolio. ACRA also takes into account the average total debt to capital ratio of the Company (the weighted average indicator is expected to equal 1.9x in 2016-2021). For the most part of the Companies liabilities, the Russian government will subsidize interest payments (from 70% to 90% of the key rate) as well as concessionary interest rates for a number of loans. In view of the above, the weighted-average FFO before net interest payments to interest payments ratio (excluding subsidies) is expected to reach 2.4x in 2016-2021.

Strong liquidity is maintained by substantial cash on Company’s accounts and significant amount of non-utilized funds from open credit facilities. The qualitative assessment of liquidity is also high owing to comfortable repayment schedule of the debt portfolio in the medium term, diversified funding sources.

Weak cash flow of the Company stems from substantial capital expenditures as KAMAZ is currently at the investment cycle peak. According to ACRA's estimates for in the period from 2016 to 2021, the Company’s average weighted FCF margin will be at least -5.9% and the capital expenditures to revenues ratio at 6.8%.

Key assumptions

  • Retaining high level of continuous government support;
  • Domestic sales of KAMAZ grow to 42,000 trucks by 2021 (+28% against 2018);
  • Successful implementation of the Company’s export strategy driving growth of export sales of trucks and assembly sets to 11,000 units by 2021 (+93% against 2018);
  • Successful implementation of the re-engineered manufacturing process project and creation of a family of K-5 generation trucks within the deadlines as set forth in the Company’s strategy.

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:

  • 20% annual increase in the Company’s sales against the projections for 2019, 2020 and 2021.
  • The weighted-average total debt / FFO before net interest payments ratio descending below 5.0x with the concurrent increase of the weighted-average FFO before net interest payments/ interest payments ratio above 5.0x.  

A negative rating action may be prompted by:

  • A substantial reduction of continuous government support;
  • 30% annual decline in the Company’s sales against the projections for 2019, 2020 and 2021.

Rating components

Standalone creditworthiness assessment (SCA): bbb+.

Support: state support, SCA +3.

Issue ratings

Exchange-traded interest-bearing certified bearer bonds issued by KAMAZ PTC, BO-07 series, maturity date: May 05, 2033, issue volume: RUB 3 bln — АА-(RU).

Exchange-traded interest-bearing certified bearer bonds issued by KAMAZ PTC, BO-08 series, maturity date: May 05, 2033, issue volume: RUB 3 bln — АА-(RU).

Exchange-traded interest-bearing certified bearer bonds issued by KAMAZ PTC, BO-09 series, maturity date: May 10, 2033, issue volume: RUB 3 bln — АА-(RU).

Exchange-traded interest-bearing certified bearer bonds issued by KAMAZ PTC, BO-10 series, maturity date: May 10, 2033, issue volume: RUB 3 bln — АА-(RU).

Exchange-traded interest-bearing certified bearer bonds issued by KAMAZ PTC, BO-11 series, maturity date: May 10, 2033, issue volume: RUB 3 bln — АА-(RU).

Exchange-traded interest-bearing certified bearer bonds issued by KAMAZ PTC, BO-P01 series, maturity date: February 04, 2022, issue volume: RUB 7 bln — А+(RU).

Exchange-traded interest-bearing certified bearer bonds issued by KAMAZ PTC, BO-P02 series, maturity date: March 25, 2022, issue volume: RUB 6 bln — А+(RU).

Credit rating rationale. The issues are senior unsecured debt instrument of KAMAZ PTC. In view of the absence of either structural or contractual subordination of the issue, ACRA assesses the bond pari passu with other existing and future unsecured and unsubordinated obligations of the Company. According to the ACRA methodology, the credit rating of the BO-P01 series (RU000A1003C0) and BO-P02 series (RU000A1007V1) bond issues is on par with that of the Company — A+(RU).

The principal amounts under BO-07, BO-08 BO-09 BO-10 and BO-11 series bonds are secured by state guarantees, therefore ACRA classifies such bonds as indemnity category I, which results in a one-notch upward adjustment of the issue credit ratings against the credit rating assigned to the Company, — to AА-(RU).

Regulatory disclosure

The credit rating of KAMAZ PTC and the credit ratings of the above bonds issued by KAMAZ PTC were assigned under the national scale for the Russian Federation and is based on the Methodology for Credit Ratings Assignment to Non-Financial Corporations under the National Scale for the Russian Federation, the Methodology for Analyzing Relationships Between Rated Entities and the State, and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities. The Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation was also applied to assign credit ratings to the above bond issues.

For the first time, the credit rating assigned to KAMAZ PTC was published by ACRA on April 23, 2018, the credit ratings assigned to BO-07, BO-08 BO-09 BO-10 and BO-11 series bonds issued by KAMAZ PTC were published by ACRA on May 14, 2018, the credit rating assigned to BO-P01 series bond issued by KAMAZ PTC was published by ACRA on February 08, 2019, and the credit rating assigned to BO-P02 series bond issued by KAMAZ PTC was published by ACRA on March 29, 2019. The credit rating of KAMAZ PTC and its outlook and the credit ratings of the above bonds issued by KAMAZ PTC 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 KAMAZ PTC, information from publicly available sources, and ACRA’s own databases. The credit ratings are solicited, and KAMAZ PTC participated in their assignment.

No material discrepancies between the data provided and the data officially disclosed by KAMAZ PTC in its financial statements have been discovered.

ACRA provided no additional services to KAMAZ PTC. No conflicts of interest were discovered in the course of credit rating assignment.

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