Training on sovereign risk credit analysis, October 24

ACRA assigns A+(RU) to KAMAZ PTC, outlook Stable

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 weak cash flow indicators resulting from the investment cycle peak 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 45% in 2017, including 64% market share in the chassis and custom vehicles market, 70% in dump trucks, 75% in high-sided trucks, and 24% in tractor units (including 17% in the long-haul tractors). The share of Company’s export revenues has been historically below 20%; however, by virtue of more active efforts in the overseas markets the Company plan to increase export sales to 22%-27% in total revenues in 2020.

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 employing 40,500 people in its major manufacturing site. 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 for scrappage and trade-in programs, 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 business profile assessment stems from weak assessments of stability of revenues/contract base and market outlets. The above is driven by sector specifics that the Company operates in, and namely, by high volatility and business cycle sensitivity of demand in the truck market and by low share of Company’s sales under long-term contracts. This market segment is very sensitive to business cycle: Annual sales in the Russian truck market range from 109,700 and 104,900 trucks at cycle peaks in 2008 and 2012 to 43,400 and 36,300 trucks at cycle bottos in 2009 and 2015. Long-term contracts represent around 10% of total sales of the Company (primarily, government contracts). At the same time, ACRA takes into account that sales volatility of KAMAZ is lower than in the truck market overall as the relatively stable export revenues and sales of spare parts dampen the Company’s sales dynamics. Business profile assessment is supported by high local content in manufacturing (around 70%); a substantial share of components is produced as part of joint ventures with global market leaders.

Medium assessments of leverage and coverage. The weighted-average ratio of the Company’s total debt to FFO before net interest payments equals 6.7x in 2015-2020, according to ACRA estimates. Very high value of this indicator is offset in leverage assessment by very high quality of the debt (with very duration as over 45% of the debt is to be repaid after 2029) and availability of state guarantees with respect to a substantial amount of the debt portfolio. We also take into consideration the average total debt to capital ratio of the Company (the weighted average indicator equals 1.3x in 2015-2020). Although the total debt amount is substantial, the efficient interest rate on Company’s borrowings would be 4.23% in 2018, according to ACRA estimates, by virtue of interest payment subsidies applicable to 69.75% of the Company's debt portfolio (from 70% to 90% of the key rate) as well as concessionary interest rates for a number of loans. The weighted-average FFO before net interest payments to interest payments ratio (excluding subsidies) would run into 3.0x in 2015-2020, which corresponds to a medium assessment of debt servicing.

Strong liquidity is maintained by substantial cash on Company’s accounts and significant amount of non-utilized funds from open credit facilities (around RUB 28 bln as at December 31, 2017). The qualitative assessment of liquidity is also high owing to comfortable repayment schedule of the debt portfolio in the medium term, diversified financing sources as well as adequate margin of safety with respect to covenants set forth in loan agreements.

Weak cash flow of the Company stems from substantial capital expenditures as KAMAZ is currently at the investment cycle peak. ACRA projects the Company’s FCF margin at -11.1% in 2018 and its further rise to -1.9% in 2020. Capital expenditures to revenues ratio is expected at 13.7% in 2018 followed by a decline to 3.7% in 2020.

Key assumptions

  • Retaining high level of continuous government support;
  • Domestic sales of KAMAZ grow to 46,400 trucks by 2020 (+40% vs 2017);
  • Successful implementation of the Company’s export strategy driving growth of export sales of trucks and assembly sets to 13,300 units by 2020 (+166% vs 2017);
  • 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:

  • An increase of Company’s sales by 31% annually versus the 2018, 2019 and 2020 projections to 56,460, 67,990, and 78,210 trucks, respectively.
  • 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;
  • A decline of the Company’s sales by 28% annually versus the 2018, 2019, and 2020 projections to 31,030, 37,370, and 42,980 trucks, respectively.

Rating components

Standalone creditworthiness assessment (SCA): bbb+.

Support: state support, SCA +3.

Issue ratings

No outstanding issues have been rated.

Regulatory disclosure

The credit rating has been assigned to KAMAZ PTC 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.

A credit rating has been assigned to KAMAZ PTC for the first time. The credit rating and its outlook are expected to be revised within one year following the rating action date (April 23, 2018).

The credit rating is based on the data provided by KAMAZ PTC, information from publicly available sources, and ACRA’s own databases. The credit rating is solicited, and KAMAZ PTC participated in its 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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