Fitch Rates Sollers-Finance 'B+'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has assigned Russia-based Sollers-Finance's (SF) Long-Term Issuer Default Ratings (IDRs) of 'B+' with a Stable Outlook. A full list of rating actions is attached at the end of this rating action commentary.
KEY RATING DRIVERS
The Long-term IDR of 'B+' reflects the risks of the currently difficult economic environment, SF's narrow domestic franchise, limited track record, the somewhat lower liquidity of the company's leasing property (represented mainly by trucks) compared with peers and tight liquidity cushion.
The ratings also factor in SF's currently low leverage - although this could increase if market growth returns - well-controlled residual value risk, adequate asset quality metrics and healthy performance to date. They further take into account a granular lease book generating stable and predictable cash flows significantly exceeding expected debt maturities.
The Stable Outlook reflects SF's significant margin of safety in terms of both capital and liquidity (based on positive asset/liability mismatches), allowing it to sustain considerable deterioration of asset quality and performance before its ratings could be downgraded. SF is also likely to benefit (more than its main peers) from expected government support of the leasing industry in 2016, as this will presumably target only commercial vehicles rather than passenger cars.
SF is a young Russian leasing company, founded in 2008 by Russian auto manufacturer Sollers, mainly to support its sales of trucks and light commercial vehicles. In 2010, Sollers sold a 50% share to Russian Sovcombank (B+/Stable/b+). At end-2015, SF was significantly smaller than its main Fitch-rated peers (Europlan, Carcade and Baltic Leasing) and operates via only 10 branches. The agency views SF's ability to scale up its business as somewhat limited.
Financial leverage (as expressed by the net debt-to-tangible equity ratio) was a comfortable 0.8x at end-2015 (1.1x post expected dividends payment), which is significantly lower than 1.5x at end-2014 and 1.9x at end-2013 due to a contraction of the lease portfolio, proceeds from which were used to redeem almost all third-party loans. According to management, a SF will tolerate leverage of up to 5x. We therefore expect leverage to increase as soon as the Russian economy recovers.
In 2015, SF's reported profit was solid (ROAE of 24%) driven mainly by wide margins despite increased funding costs (13.3% in 2015, a 250bps increase from 2014). The hike in funding cost was offset by an increase in effective finance lease rate (defined as finance lease income divided by average net investment in lease) of 420bps, underpinned partially by the state subsidy of lessees' advance payments during 2015.
Fitch considers SF's liquidity position as adequate given that the debt repayment schedule is notably longer than asset amortisation. However, SF has maintained a negligible liquidity cushion, using all proceeds from leases to redeem outstanding borrowings. To meet immediate liquidity needs SF uses a permanently available revolving credit line from its shareholder, Sovcombank, which also acts as treasury for the company. Refinancing risk is limited given that the bulk of SF's funding at end-2015 was from Sovcombank.
Fitch does not expect negative rating action given SF's moderate leverage and reasonable performance to date, which is reflected in the Stable Outlook. However, a sharp increase of SF's leverage, or a considerable deterioration of asset quality and performance could result in a downgrade of the ratings.
Upgrade potential for SF's ratings is currently limited unless the company significantly develops its franchise, diversifies underlying assets by type and reduces dependence on Sovcombank for liquidity support.
The rating actions are as follows:
Long-term foreign and local currency IDRs: assigned at 'B+', Stable Outlook
Short-term foreign currency IDR: assigned at 'B'
National Long-Term rating: assigned at 'A(rus)', Stable Outlook