The credit rating of JSC «UEC» (hereinafter, the Group, the Company, or UEC) is based on the Company’s high systemic importance for the Russian Federation and the very high level of state influence on the Company.
The Company’s standalone creditworthiness assessment (SCA) is based on an average market position, strong business profile, as well as the Company’s large size and high profitability. The SCA is limited by the Company’s high leverage and average liquidity, as well as its weak cash flow.
UEC is a state holding company, which consolidates enterprises that develop, test, and produce gas turbine aircraft engines, helicopter engines, rocket engines, ground-based gas turbine installations for the oil and gas industry, as well as marine gas turbine engines. UEC’s controlling shareholder is Rostec State Corporation (AAA(RU), outlook Stable), which owns 84.74% of the Company’s shares. The state owns 13.4% via the Federal Agency for State Property Management, while the remaining 1.86% is owned by JSC “Russian Aircraft Corporation “MiG.”
Key rating assessment factors
High systemic importance and a very high level of state influence on the Company. ACRA continues to assess the systemic importance of UEC for the Russian economy as high due to the Company’s production of unique military products, the important role of the defense industry in ensuring Russia’s national security, and the lack of alternative suppliers in this segment. In addition, the Group’s enterprises produce products under international contracts, and failure to fulfill these contracts could lead to financial losses for the state, as well as political and reputational risks. The Company continues to consistently receive direct state support in the form of co-financing for its investment program, state guarantees, and subsidized interest rates on bond loans.
Weak cash flow and average liquidity assessment. ACRA expects a significant increase in UEC’s capital expenditures (CAPEX) by the end of 2021. At the end of 2019, the ratio of CAPEX to revenues was 15%; in 2020–2021 ACRA predicts this indicator to increase to 21%. Due to the impact of the large-scale investment program in the forecast period (the next three years), free cash flow (FCF) will remain in the negative zone, which will continue to put pressure on the Company’s liquidity. The debt repayment schedule, which assumes a fairly large volume of payments over the next three years, also has a negative impact on the liquidity assessment. UEC’s liquidity assessment is heavily supported by a large volume of undrawn credit lines (RUB 84.5 bln).
Leverage has grown to a high level. The consistently negative FCF over an extended period of time has resulted in growth of UEC’s debt, which in turn leads to increased leverage. At the end of 2019, the ratio of total debt to FFO before net interest payments exceeded 3.5x, which corresponds to a high level according to ACRA’s methodology. According to ACRA’s forecasts, in 2020 this figure may increase to 3.97x, but in 2021–2023 it is unlikely to exceed 4.1x. The total debt to equity ratio remains below 1.0x.
Strong business profile. The COVID-19 pandemic has hardly affected UEC’s order portfolio, both in the domestic market and in terms of international orders. There is a risk of a slight decrease in the contract base in the medium term due to the reduction in defense spending in the Russian Federation. On the other hand, ACRA notes the successful maiden flight of the MS-21 fitted with the Company’s PD-14 engine. This project may have a significant positive impact on UEC’s future order book. At the same time, ACRA notes that sanctions have been imposed against a number of Russian companies, including UEC, which implies additional risks related to suppliers.
Key assumptions
- Implementing the capital investment program in the amount of RUB 147 bln in 2021–2023;
- No sharp drops in demand for the Company’s products in the domestic and foreign markets;
- No significant fluctuations in the prices for the Company’s products;
- Maintaining high product quality with no significant technical problems with engines, which could lead to a decrease in the contract base and reputational risks.
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 positive rating action may be prompted by:
- Increased systemic importance and significantly increased state support.
A negative rating action may be prompted by:
- Significantly decreased systemic importance.
Rating components
SCA: a-.
Adjustments: none.
Support: state — on par with the RF minus 3 notches.
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 Non-Financial Corporations under the National Scale, the Methodology for Analyzing Relationships Between Rated Entities and the State, and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities.
The credit rating of JSC «UEC» was published by ACRA for the first time on December 30, 2019. 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 «UEC», information from publicly available sources, as well as ACRA’s own databases. The credit rating is solicited, and JSC «UEC» participated in its assignment.
No material discrepancies between the provided data and the data officially disclosed by JSC «UEC» in its financial statements have been discovered.
ACRA provided no additional services to JSC «UEC». No conflicts of interest were discovered in the course of credit rating assignment.
