OREANDA-NEWS. Fitch Ratings has downgraded Russia-based Sukhoi Civil Aircraft JSC's (SCAC) National Long- and Short-term Ratings to 'A+(rus)' and 'F1(rus)', respectively, from 'AA-(rus)' and 'F1+(rus)'. The Outlook on the National Long-term Rating is Negative.

The downgrade of the National Ratings follows the agency's recent downgrade of SCAC's International Long- and Short-term Issuer Default Ratings (IDRs), in the wake of its downgrade of The Russian Federation (see 'Fitch Downgrades Russia to 'BBB-'; Outlook Negative' dated 9 January 2015 on www.fitchratings.com). SCAC's ratings are linked to those of Russia.

KEY RATING DRIVERS

State Support
In line with Fitch's parent subsidiary linkage methodology, SCAC's ratings are notched down three levels from the ratings of its ultimate majority shareholder, the Russian sovereign (BBB-/Negative). The three-notch differential reflects the company's strong links to the state but also the lack of explicit state guarantee for SCAC's debt. However, a high share of SCAC's debt comes from state-owned banks while state-owned intermediate holding companies, including United Aircraft Corporation and Sukhoi Aviation Holding, provide guarantees for a material proportion of SCAC's debt. The Outlook reflects that of the Russian sovereign.

Due to the government's shareholding, Fitch expects SCAC to continue to receive support from the Russian State via further equity injections over and above what has already been contributed. Any waning, actual or perceived, of that support, is likely to lead to SCAC's ratings being further notched down from those of the sovereign.

Super Jet 100
The relationship between SCAC and the Russian government is underpinned by the strategic importance of the Super Jet 100 (SSJ 100) aircraft to the State, which is likely to be the entry point for other Russian commercial aircraft programmes such as the MS21. In 2014, the SSJ 100 was complemented by a business jet version as SCAC's only products to date. A stretch version of the SSJ 100 is likely to be delivered around 2018.

CIS and Emerging Market Demand
Other factors influencing the ratings are strong domestic demand for the SSJ 100 (152 orders taken to date plus 53 options/soft orders), the presence of French-based engine manufacturer SNECMA as a risk-sharing partner on the SSJ 100 programme, and the long-term potential for cash flow generation. On a standalone basis, however, SCAC is unlikely to be profitable in the next two years.

RATING SENSITIVITIES

Future developments that could lead to positive or negative rating actions include:
- Changes to the sovereign ratings, which could prompt a review of the company's IDRs, National Ratings and Outlook
- Any strengthening of state support, such as a provision of written guarantees of SCAC's debt from the Russian Ministry of Finance, would likely lead to a closer rating linkage between SCAC and the government. A weakening of support, such as a reduction in the state's shareholding in SCAC, or a waning commitment to the company's programmes, could lead to a widening of the rating gap between Russia and SCAC

For the sovereign ratings of the Russian Federation, Fitch has the following rating sensitivities as of the rating action commentary dated 9 January 2015:

The following risk factors individually, or collectively, could trigger a negative rating action:
- Continued exchange rate volatility, leading to broader financial sector instability requiring greater public financial support
- Sustained low oil prices and/or continued recession in 2016, with adverse implications for the public finances and financial sector stability
- Faster-than-forecast depletion of international reserves, reflecting larger-than-expected capital flight and/or accelerated dollarisation domestically
- An intensification of sanctions or a geopolitical risk event

The Outlook is Negative. Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a high likelihood of leading to a positive rating action. However, future developments that could individually, or collectively, result in the Outlook being revised to Stable include:
- A reduction in tensions with the international community, resulting in an unwinding of sanctions and renewed access for Russian entities to international capital markets
- A sustained recovery in the oil price, coupled with an easing of macroeconomic and financial stress