The credit rating of JSC “AHML” (hereinafter — AHML, or the Agency) is on par with financial obligations of the Government of the Russian Federation and is related to a very high likelihood of the state providing AHML with extraordinary support in view of the Agency’s systemic importance for the Russian economy and a determining influence that the government has on its creditworthiness. According to ACRA’s base case scenario, AHML’s standalone creditworthiness does not affect its credit rating. The Agency has a high level of creditworthiness compared to other rated entities in the Russian Federation. However, in the long term, this creditworthiness may come under pressure, if the Agency implements its rather ambitious development strategy.
By the law, AHML performs a unique role of a unified housing sector development institution providing full support to the housing sector in the Russian Federation. The Agency’s key objectives are an increase in housing availability through developing the mortgage market, establishing mechanisms for housing construction financing, and providing developers with land resources. As of September 30, 2016, the Agency employed 272 people.
ACRA expects that, under a systemic economic stress scenario and/or in case of a significant Agency’s own creditworthiness deterioration, the Russian Government will provide it with extraordinary support in the form of capital or liquidity injection sufficient to meet creditor claims. This is based on the following assumptions.
Very high systemic importance. AHML is a development institution that, in accordance with its mandate set by the law, performs a unique function of developing and supporting the housing market in Russia. The Agency is included on the list of strategically important institutions not subject to privatization. The Russian Government participates in managing such institutions in order to provide for strategic state interests, defense and national security issues, as well as ensure protection of rights and interests of Russian citizens. By ACRA’s estimates, ensuring available housing in Russia is one of state priorities AHML is meant to take part in tackling. Moreover, the Agency is also responsible for supporting mortgage borrowers in difficult financial situations (direct financing by the Russian Government via an increase in AHML’s authorized capital by RUB 4.5 bln in 2015). On a separate note, ACRA states that, as of end September 2016, around 68% of the Agency’s public debt (RUB 88.2 bln) was covered by irrevocable guarantees of the Russian government. On the whole, these facts further emphasize the systemic and social importance of the Agency and its role in the state economic policy.
In addition to the Agency's status of the Russian housing market development institution, ACRA notes its important role in the country’ financial system. In November 2016, the Bank of Russia set the risk ratio for investments in ruble-denominated bonds issued by AHML and mortgage-backed securities guaranteed by the Agency at the level of 20% instead of 100%, thus stimulating demand for these instruments from the financial sector. According to ACRA, a default on these obligations would entail not only financial, but reputational losses for the state.
Very strong state influence on creditworthiness. AHML was established in 1996 by a government decision, with the state (the Federal Agency for State Property Management) being its sole shareholder. Being in control of the Agency, the government has the power to determine its development strategies and supervise its operating activities: the AHML Board of Directors (approved by the Russian government) includes representatives of Russian federal authorities, the Bank of Russia, and the largest systemically important credit institutions. In addition, a joint working group set by the Bank of Russia constantly monitors the Agency’s financial status.
ACRA also notes the following factors exemplifying the strong ties between AHML and the government:
(1) a set-by-law immunity against the established bankruptcy procedure; (2) a state’s readiness to provide an extraordinary support via budget mechanisms set by the law; (3) former precedents of support provided in the form of state financing (a purpose loan by Vnesheconombank worth RUB 40 bln, income from selling and renting out federal-status land plots – a transaction type previously handled by the Russian Housing Development Foundation).
High creditworthiness level with a potential risk of deterioration in ability to absorb losses in the long term. Although AHML’s own creditworthiness is not considered as a factor in the structure of its credit rating, we note a strong operational and financial performance of the Agency, with a substantial capital adequacy cushion (total capital divided by assets and contingent liabilities returned 34% as of end September 2016) deserving the first mention, as it provides for an exceptional ability to absorb loan and other losses. This is achieved by stable capital generation fueled by income, with the averaged capital generation ratio (ACGR) standing at around 130 bps for the last five years. The financial result is supported by consistently high net interest margin in the Russian context (5.6% on average for the last three years) and high operating efficiency (cost-to-income ratio equaled 21.6% for 9M2016). Asset quality is adequate, with assets concentrated mainly in the sector of mortgage loans and mortgage-backed bonds, while the share of non-performing loans past due over 90 days was 5.4% as of September 30, 2016. Liquidity position is strong – as of end October 2016, the short-term liquidity shortage indicator (STLSI) was positive in both the base case and stress scenarios on the three-month forecast horizon.
ACRA notes that AHML’s long-term development program provides for an active development of the mortgage securitization market in the form of one-tranche mortgage-backed securities (the MBS Factory), which will result in a substantial increase in the volume of mortgages on Agency’s balance sheet (7x by end 2020). As the logistics of the facility envisage potential credit losses to be covered by the Agency (through buying out defaulted mortgages), the implementation of the development program in full might lead to a significant decline in the Agency capital’s ability to absorb unexpected credit losses and may result in an increase of a potential need for state support. ACRA also sees additional uncertainty in the radical change of AHML’s operating model implemented by the new management, as its ability to effectively manage risk appetite has not been tested in the course of the economic cycle.
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:
Standalone creditworthiness assessment (SCA): none.
Support: on par with the Russian Federation.
No outstanding issues have been rated.
The credit rating has been assigned under the national scale for the Russian Federation and is based on 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. Certain SCA factors were determined with the partial use of the Methodology for Credit Ratings Assignment to Banks and Bank Groups Under the National Scale for the Russian Federation.
A credit rating has been assigned to JSC “AHML” for the first time. The credit rating and its outlook are expected to be revised within one year following the rating action (December 28, 2016).
The assigned credit rating is based on the data provided by JSC “AHML,” information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using the consolidated IFRS statements of JSC “AHML” and the standalone financial statements of JSC “AHML,” drawn up in compliance with the Bank of Russia Ordinance No. 2332-U of November 12, 2009. The credit rating is solicited, and JSC “AHML” participated in its assignment.
No material discrepancies between the provided information and the data officially disclosed by JSC “AHML” in its financial statements have been discovered.
ACRA provided no additional services to JSC “AHML.” No conflicts of interest were discovered in the course of credit rating assignment.
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