The credit rating of JSC VEB-leasing (hereinafter, VEB-leasing, or the Company) is equal to the rating of the Supporting Organization, State Development Corporation “VEB.RF” (ACRA rating: AAA(RU), outlook Stable; hereinafter, VEB.RF, or the Group), and is based on very high likelihood of extraordinary support from the Supporting Organization.
VEB-leasing is a specialized leasing company focused on financial and operational leasing services, primarily covering air, railroad, and water transport.
The Company’s 2020 strategy involves broadening its ship leasing services and occasional participation in developing projects of Russian cities. ACRA cannot rule out the transfer of the Company’s railroad business to a specialized market participant that operates rolling stock in the next 12 months.
Key rating assessment factors
ACRA assesses the likelihood of support from VEB.RF as very high. This stems from the high level of integration between the subsidiary and its parent company, as well as from the significant role played by the Company in the strategy of VEB.RF, in particular, in supporting the priority industries of the Russian economy and the implementation of the national projects.
In the final quarter of 2019, the level of integration between VEB-leasing and the financial group VEB.RF grew considerably. This provided for the optimization of operating expenses, the elimination of duplicate functions, and the deployment of a unified risk management system and treasury within the Group. The number of employees who are registered as employed by VEB-leasing has been reduced to a minimum. Therefore, the parent entity now exercises full operational control over the Company. In addition, ACRA notes that the Company’s operations are primarily financed by VEB.RF (at least 70% of obligations). This figure is set to grow in the future, as the Group’s plans do not envisage external borrowing from the balance sheet of VEB-leasing.
Taking into account the changes in the relationships within the Group and the long history and numerous examples of VEB.RF’s assistance to VEB-leasing (both in the form of capital and liquidity), ACRA believes that carrying out a standalone creditworthiness assessment (SCA) for the Company is no longer appropriate.
Therefore, the rating of VEB-leasing is entirely determined by its very strong ties with the Supporting Organization. The strength of these ties is also evidenced by the cross-default provisions contained in a number of VEB.RF’s debt obligations, according to which a default or dissolution of VEB-leasing constitute an event of default for VEB.RF. ACRA also notes that VEB.RF has provided guarantees and suretyships for a number of leasing projects implemented by the Company.
Besides traditional support for the aviation segment, ACRA assumes that VEB-leasing’s main area of activity in the next 12 months will be financing shipbuilding transactions, in particular, specialized tankers for the transportation of petroleum products and gas condensate. The leasing portfolio, which is secured by advance payments for these projects, should grow by around 13% in 2020. Financing these transactions may involve taking a loss at initial recognition, which will have a negative impact on the Company’s capital by the end of the year. Accordingly, if there will not be any external capital injections, ACRA expects significant pressure on capital indicators in the next 18 months.
The weakening of the ruble exchange rate and the spread of COVID-19 may also put pressure on the credit quality of the Company’s leasing portfolio, since foreign exchange transactions in the civil aviation segment account for at least a third of the portfolio.
In addition, ACRA assesses the current quality of the leasing portfolio as quite low. According to ACRA, the share of accumulated realized problem assets is about 30% of the portfolio. These risks are partly mitigated by the relatively high level of coverage of such assets by reserves for impairment, which amount to approximately 80%. The Company created these reserves in 2016 and 2017 and the annual cost of risk was 17% and 33%, respectively.
On the other hand, the potential for external support remains the most important factor mitigating possible credit losses over the next 18 months. VEB.RF has repeatedly provided capital injections to the Company in the past to form reserves and maintain capital adequacy. ACRA expects that future assistance will be provided as necessary.
Key assumptions
- Maintained potential for external support from the Group;
- Development within the new management model, which implies full integration with VEB.RF.
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 negative rating action may be prompted by:
- Signs of decreased probability of support from VEB.RF.
Rating components
SCA: none
Adjustments: none.
Support: The final rating is equal to the credit rating of VEB.RF.
Issue ratings
No outstanding issues have been rated.
Regulatory disclosure
The credit rating has been assigned under the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Leasing Companies Under the National Scale for the Russian Federation, the Methodology for Analyzing Member Company Relationships Within Corporate Groups, and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities.
The credit rating of JSC VEB-leasing was published for the first time on April 18, 2018. The credit rating and its outlook are expected to be revised within one year following the publication date of this press release.
The credit rating was assigned based on the data provided by JSC VEB-leasing, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using IFRS consolidated statements of JSC VEB-leasing and statements of VEB-leasing composed in compliance with RAS. The credit rating is solicited, and JSC VEB-leasing participated in its assignment.
No material discrepancies between the provided data and the data officially disclosed by JSC VEB-leasing in its financial statements have been discovered.
ACRA provided additional services to JSC VEB-leasing. No conflicts of interest were discovered in the course of credit rating assignment.
