Fitch Affirms Russian Helicopters at 'BB'; Outlook Stable
In line with Fitch's parent-subsidiary linkage methodology, the ratings incorporate a one-notch uplift for support for the company from its ultimate parent, the Russian Federation (BBB/Negative).
KEY RATING DRIVERS
Mixed Financial Profile
Notwithstanding the effect of the RUB devaluation over the past 12 months, RH's financial profile, on balance, is indicative of a 'BB' category industrial company. Earnings and cash flow from operations (CFO) margins as well as free cash flow (FCF) generation, leverage and liquidity are in line with industry peers, although they are likely to deteriorate and return to historical levels in the medium to long term as the positive effect of the RUB devaluation wears off.
For the last 12 months (LTM) to 30 June 2015, the CFO margin was 3.3%, significantly down from the 13.4% achieved in 2014 and 8% in 2013 as a result of a material working capital built-up in 1H15, which is expected to be at least partially reversed in 2H15. The LTM 1H15 FCF margin was materially negative (-5%) due to the working capital flows in 1H15, but is likely to turn positive in FY15 and stay above 5% of revenue in the medium term as a result of declining capex and development costs.
The company's debt remained stable at end-1H15, but because of the currency induced improvement in FFO, gross leverage improved to under 2.0x, from 2.5x at end-2014 and 4.8x at end-2013. Fitch expects leverage to stabilise at around 2.0x-2.5x in the next two to three years as the effect of the sharp swings in the RUB subside.
Average Business Profile
RH has a strong market position, with a globally dominant role in certain segments, such as attack and heavy-lift helicopters. These are high-priced items on which RH can generate robust returns thanks to efficient production and low labour costs. Nevertheless, RH is only strong in certain types of helicopter segments (although these constitute a significant share of the global market). The company remains heavily reliant on the Russian Ministry of Defence for much of its business, and its service business is underdeveloped.
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, including RH's parent company, Oboronprom, which is barred from raising funds in the EU and US. As the sanctions also apply to all subsidiaries, RH is also restricted from raising money on these capital markets. However, given that RH is funded locally and for the most part via Russian state-owned banks, these sanctions do not affect the company's liquidity or financial flexibility.
If RH was to have new or additional sanctions placed on it in the future, Fitch would treat it as event risk.
Fitch's key assumptions within the rating case for RH include
- Helicopter deliveries to be flat in 2015 and decline marginally each year thereafter.
- Gross and EBIT margin gradually return to historical average in the long term as the currency effect of 2014 is smoothed out via change in pricing; the benefit from present restructuring measures to have some positive effect on margins in the short to medium term.
- Working capital cash flows to turn positive from 2016 owing to the decline in production/deliveries.
- Capitalised development costs to decline after 2015 as development work peaks in 2014.
- Tangible capex to also decline gradually after 2015.
- Dividends to rise steadily in line with profits.
Negative: Future developments that could lead to negative rating action include:
- A visible reduction in state support.
- CFO margin declining below 8% on a sustained basis.
- FFO-adjusted gross leverage consistently above 4x.
- Consistently negative FCF margin.
- FFO fixed charge cover under 3.0x (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.
- CFO margin above 10%.
- FCF margin over 2% on a sustained basis.
- Tangible reduction in gross debt levels leading to FFO-adjusted gross leverage improving to below 3x on a sustained basis.
- Improvement in the liquidity position with adjusted cash levels and committed bank lines significantly in excess of short term debt maturities.
Weak to Moderate Liquidity
At end-1H15, the group had reported cash of RUB28.7bn on its balance sheet against short-term debt of RUB36.6bn which is broadly in line with historical levels. The issue of long term RUB bonds in 2013 has improved the balance of short-term to long-term debt somewhat, although the company remains reliant on regular refinancing of maturing debt. High investment needs as well as possible large working capital swings mean that FCF was negative in three of the past five years, although it is likely to be positive in the short to medium term. For the purposes of liquidity analysis, Fitch deducts RUB2bn for intra-year operational needs and treats this as 'not readily available cash'.
FULL LIST OF RATING ACTIONS
Russian Helicopters JSC
--International foreign currency Long-term IDR affirmed at 'BB'; Outlook Stable
--International foreign currency Short-term IDR affirmed at 'B'
--International local currency Long-term IDR affirmed at 'BB'; Outlook Stable
--National Long-term IDR affirmed at 'AA-(rus)'; Outlook Stable
--National Short-term IDR affirmed at 'F1+(rus)'