The credit rating of JSC "ZTZ" (hereinafter, ZTZ, or the Company) has been affirmed based on the stability of the calculated leverage and debt service ratios, as well as on the Company maintaining profitability and liquidity within the established values, despite the decline in financial indicators in 2020 due to restrictions associated with the spread of COVID-19.
On the one hand, the credit rating of ZTZ is based on its strong market position, medium business profile and corporate governance, as well as low leverage and high interest coverage. On the other hand, the rating is constrained primarily by the size of the Company’s business. The rating also takes into account weak geographical diversification, a low degree of vertical integration, and concentration on one plant.
ZTZ is one of the largest producers of large-diameter pipes (LDP) in Russia. The Company’s main activity is production of electric-welded LDPs for oil and gas pipelines. The Company also produces polyurethane foam insulation pipes. In 2020, the Company’s revenue under RAS was RUB 33.4 bln compared to around RUB 45 bln in 2019, while sales of basic goods (LDPs) fell because of the postponement of major infrastructure projects and repair and maintenance work as a result of restrictions imposed due to the coronavirus pandemic. ZTZ is the key asset of the Company, and there are no other production assets. The Company has a staff of around 1,400 employees. The controlling stake (74.99%) is owned by ZTZ Holding Limited (an offshore company), whose ultimate beneficiary is D. G. Safin, CEO of the Company. 25% of shares are owned by LLC “Ksedos Invest”, which is accountable to N. D. Yegorov.
Key rating assessment factors
The Company’s operational risk profile assessment stems, on the one hand, from strong assessments of such factors as the market position and the focus on production of high value-added products, which include LDPs that meet high environmental and technological requirements for installation in high-pressure oil and gas pipelines. In 2020, the Company’s share in the Russian LDP market stood at 29%. On the other hand, low assessments of such sub-factors as the degree of vertical integration and diversification of sales markets constrained the final assessment of the Company’s operational risk profile. The low assessment of geographical diversification is due to the low share of export contracts in the Company’s revenue structure and low diversification of production assets, i.e. there is a concentration on one plant. In the coming years, ZTZ plans to supply products for the implementation of key projects of PJSC Gazprom (hereinafter, Gazprom; ACRA rating — AAA(RU), outlook Stable). ZTZ also plans to proactively boost exports.
The medium level of corporate governance is due to the transparent business structure and successful implementation of the Company’s aggressive growth strategy.
The Company’s top management is made up of professionals with extensive expertise in the industry. ZTZ applies certain risk management system elements (for example, exchange rate risk hedging), but no unified documents on the strategy and risk management have been approved yet. Financial transparency is low because the Company compiles reports only under RAS, and there is no practice of public disclosure of operational and financial indicators on a regular basis. The business structure is simplified as much as possible: ZTZ is the core operational asset and owner of the property.
The Company’s financial risk profile assessment is based on its low leverage and high coverage of fixed charges. The ratio of total debt to operating cash flow (FFO) before net interest payments was maintained at around 2.0x in 2020, despite moderate growth of the absolute value of total debt. ACRA expects the ratio of total debt to FFO before net interest payments to decline to 1.8x by the end of 2021. The high debt service assessment is a consequence of the high FFO before net interest payments to interest payments ratio (6.1x in 2020). The level of the Company’s financial risk profile and, ultimately, its standalone creditworthiness assessment (SCA) are constrained primarily by the size of the Company’s business, which is defined as the absolute value of the FFO ratio before net interest payments and taxes (less than RUB 5 bln). Additionally, the Company’s FFO margin before interest payments and taxes (14% in 2020) corresponds to the average level in the pipe segment of the market, yet it is significantly lower than the margin of vertically integrated metallurgical holdings.
Medium liquidity assessment. Considering that the Company’s loan portfolio consists mainly of credit lines from banks with short maturities (peak repayments on existing credit lines are due in 2022), the liquidity assessment is mainly determined by the Company’s ability to successfully extend its loan agreements. Taking into account the low degree of diversification of creditor banks and an uneven repayment period, the Company’s liquidity is assessed as medium.
Medium cash flow assessment. As of the end of 2020, the Company’s free cash flow (FCF) remained negative, largely due to the increase in investments in working capital due to significant repayment of accounts payable. ACRA expects FCF to be positive in 2021 as a result of the moderate investment program and positive flow from declining working capital.
Key assumptions
- Sales of products at prices based on the Company’s data under the existing contracts; the volumes of sales are in line with the plans outlined by ZTZ;
- Higher expenses of the Company based on contract prices for raw materials and ACRA’s inflation expectations;
- ZTZ will remain one of the key suppliers of LDPs for Gazprom;
- No dividend payments.
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:
- FFO margin before interest payments and taxes growing above 15%;
- Lower leverage (total debt to FFO before net interest payments below 1.0х);
- Weighted average FCF margin exceeding 2%.
A negative rating action may be prompted by:
- Significant increase in the weighted average leverage above 3.5x;
- Decline of the weighted average debt service ratio below 2.5x;
- Significant decrease in the Company’s market share;
- Reduction of the average ratio of FFO before interest payments and taxes below RUB 5 bln;
- Significant deterioration in access to external and internal sources of liquidity.
Rating components
SCA: bbb+.
Adjustments: none.
Issue ratings
There are no outstanding issues.
Regulatory disclosure
The credit rating has been assigned to JSC "ZTZ" under the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Non-Financial Corporations under the National Scale for the Russian Federation and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities.
The credit rating of JSC "ZTZ" was published by ACRA for the first time on May 22, 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 data provided by JSC "ZTZ", information from publicly available sources, and ACRA’s own databases. The credit rating is solicited, and JSC "ZTZ" participated in its assignment.
In assigning the credit rating, ACRA used only information, the quality and reliability of which was, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.
ACRA provided no additional services to JSC "ZTZ". No conflicts of interest were discovered in the course of credit rating assignment.
