OREANDA-NEWS. Fitch Ratings has affirmed Russian Helicopters JSC's (RH) Long-Term local and foreign currency Issuer Default Ratings (IDR) at 'BB' and its Long-term National Rating at 'AA-(rus)'. The Short-term foreign currency IDR and the Short-term National Rating have been affirmed at 'B' and 'F1+(rus)' respectively. The Outlooks on the Long-Term IDR and the Long-term National Rating are Stable.

In line with Fitch's parent-subsidiary linkage methodology, the ratings incorporate a one-notch uplift for support for the company from the ultimate parent, the Russian Federation (BBB/Negative).

At present, the company's ratings are not affected by any sanctions imposed by the European Union and the US government against certain Russian companies. If Russian Helicopters was to have sanctions placed on it in the future, such an occurrence will be treated as event risk by Fitch.

Fitch notes the significant level of secured debt on the company's balance sheet (approximately 70% of total debt at end-1H14). In the context of the company's high overall leverage, Fitch believes that should a senior unsecured rating be assigned, a one-notch differential between the IDR and the unsecured debt would be likely.

RH's financial profile, on balance, is indicative of a lower-end 'BB' category industrial company. While earnings and funds from operations (FFO) margins are in line with industry peers, free cash flow (FCF) generation, leverage and liquidity are weak. These financial metrics are, and will be, key drivers of rating actions. In 2013, the FFO margin was 8.6%, down slightly from 9% in 2012, but broadly consistent with the guidelines of the ratings. Its 2013 FCF margin was under 1%, but is likely to turn negative in 2014 as a result of high capex, before returning to a small positive in subsequent years.

The company's debt remained high at end-2013 owing to limited cash generation and gross leverage of 4.9x, above the previous downgrade guideline of 4.5x. Fitch expects leverage to be around 5x at end-2014 before declining to under 4x in 2015 as the presently intensive investment needs recede and cash generation improves and is applied toward debt repayment.

RH maintains a strong market position, with a globally dominant role in certain segments, such as attack or heavy-lift helicopters. These are high-priced items on which RH is able to generate robust returns owing to its efficient production and low labour costs. Nevertheless, the company is only strong in certain types of helicopter segments (although these constitute a significant share of the global market), remains heavily reliant on the Russian Ministry of Defence for a significant portion of its business, and its service business is underdeveloped compared with peers.

RATING SENSITIVITIES
Negative: Future developments that could lead to negative rating action include:
- A visible reduction in State support
- FFO margin declining below 8% on a sustained basis
- FFO-adjusted gross leverage consistently above 4x
- Consistently negative free cash flow margin
- FFO fixed charge cover under 3x (2.9x in 2013) on a sustained basis
-Evidence of a lack of clarity in, or consistency in the execution of, the company's strategy

Positive: Future developments that could lead to positive rating actions include:
- Evidence of a greater State support, for example, in the form of state guarantees for external debt issued by non-state controlled banks.
- FFO margin above 10%
- FCF margin over 2% on a sustained basis
- FFO-adjusted gross leverage improving to below 3x
- FFO fixed charge cover over 4x.