The credit rating of Incab LLC (hereinafter, Incab, or the Company) has been affirmed due to the Company maintaining its credit metrics within the ranges established for the previously assigned credit rating. The strategy of boosting production capacity to increase the supply of semi-finished products in order to bring them to final product stage in the North American market is being implemented in accordance with the Company’s plans. The transition of financial reporting to IFRS standards has a positive impact on the assessment of the financial transparency sub-factor.
The Company’s credit rating is determined by its size, which is below average for the Russian corporate sector (the absolute value of FFO before net interest payments and taxes is under RUB 5 bln), and the medium assessment of corporate governance. At the same time, ACRA notes the strong geographical diversification of sales markets and high business profitability under IFRS reporting, despite its relative decrease in calculations based on RAS statements previously used for assessment.
The low assessment of the financial risk profile is the result of high leverage and medium debt service coverage. The short-term liquidity indicator is average, largely due to the availability of undrawn credit lines. Without them, the liquidity assessment would be very weak. At the same time, ACRA notes the Company’s work to refinance existing lending commitments using cheaper funds, which are to be allocated as part of the Company’s import-substitution activities, as well as from a planned bond issue.
Although Incab is a small organization in terms of the Russian corporate sector, it operates one of the largest optical cable production factories in Europe and the largest in Russia and other CIS countries. The wide range of cables manufactured by the Company allows it to supply consumers from various industries, such as telecommunications, energy, oil production, petrochemicals and oil refining, oil and gas transportation, the defense industry, transport, mining, and metallurgy. According to the Company, its market shares in Russia and the CIS, Europe, and the US are 28%, 1%, and 0.5%, respectively. The Company, including its subsidiaries and affiliates, employs 405 people. Incab is owned by a single beneficiary, its CEO A. V. Smilgevich
KEY ASSESSMENT FACTORS
The strong business profile and market position take into account the low share of the contract base in revenue profile (less than 1.5 annual revenues). However, the low cyclicality and the saturated market for the Company’s products due to the low penetration of optical fiber in communication and data transmission systems are taken into account when assessing these indicators. The assessment of dependence on subcontracting and components takes into consideration the fact that the Company’s enterprises perform the core activities, the share of subcontracted work is low. In addition, the Company is able to replace subcontractors and suppliers without incurring major losses. Diversification of sales markets has been assessed as high in view of exports, which contribute more than 20% of the Company’s revenues.
The medium corporate governance assessment stems from the average assessment (in the context of the Russian corporate sector) of sub-factors such as the management strategy and risk management system, for which the Company has established procedures and designated bodies that are responsible for making decisions and their implementation. As Incab’s charter capital is held by its sole shareholder, all key decisions are made and management is performed by him alone. As of the assessment, the Company did not have a board of directors, however, strategic decisions are made collegially via Incab’s board. Consequently, the management structure received a below-average assessment. The structure of the group was assessed as average, taking into account the existence of subsidiaries and affiliates, as well as transactions with related parties, although they are economically feasible. The financial transparency assessment has been improved to average due to the Company starting to publish consolidated financial statements under international standards.
The financial risk profile assessment is based on the below-average size of business and high leverage (the FFO before net interest payments to interest payments ratio was 6.2x in 2020 compared to 6.8x in 2019), which are the main constraints on the Company’s rating. At the same time, the Company enjoys high business profitability, with the ratio of FFO before interest payments and taxes to revenues standing at around 11% for 2020 compared to 12% in 2019. ACRA expects profitability in 2021 to be in line with last year’s figure and then increase to 15% in 2022 as sales grow in the North American market. Debt service is average as despite high leverage and the accompanying large interest payments, Incab’s high profitability ensures sufficient cash from operations to service the debt.
Free cash flow (FCF) was negative in 2018–20202, and ACRA expects it to remain negative in 2021–2022 due to higher capital expenditures. As capital expenditures decline, in 2023 FCF will turn positive, which will enable the Company to reduce its leverage. The Company has average short-term liquidity, which is due to unused limits on revolving credit lines provided by banks. The absence of free limits to replenish working capital, in the amount available to the Company, would have had a negative impact on the liquidity assessment due to the lack of internal liquidity sources.
KEY ASSUMPTIONS
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Meeting the revenue and operating cash flow targets for 2021–2023;
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Total capital investments in 2021–2023 in line with the business plan;
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Medium FFO margin before interest payments and taxes (no lower than 14%) within the forecast horizon;
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No major annual dividend payments within the forecast horizon.
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:
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Total debt to FFO before net interest payments ratio falling below 3.5x amid simultaneous growth of the FFO before net interest payments to interest payments ratio above 5.0x;
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FCF margin exceeding 2%.
A negative rating action may be prompted by:
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Short-term liquidity ratio falling below 1.0x;
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Coverage deteriorating to lower than 2.5x.
RATING COMPONENTS
SCA: bbb-.
Support: none.
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 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 Incab LLC was published by ACRA for the first time on October 12, 2020. 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 Incab LLC, information from publicly available sources, and ACRA’s own databases. The rating analysis was performed using the IFRS financial statements of Incab LLC. The credit rating is solicited, and Incab LLC 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 Incab LLC. No conflicts of interest were discovered in the course of credit rating assignment.
