The credit rating of Irkut Corporation (hereinafter, Irkut) is driven by the support from both PJSC United Aircraft Corporation (UAC), Irkut's parent company, and the state. In view of this, the credit rating is set at A(RU), i.e. three notches higher than the corporation's standalone creditworthiness assessment (SCA), which stems from the medium assessments of market position and business profile, and the very high score for geographic diversification. The medium level of corporate governance had a neutral effect on the credit rating, while the main rating constraint is the low assessment of the financial risk profile, which is explained by the high leverage and very low free cash flow (FCF).
Irkut is a research and manufacturing corporation within UAC. It develops, manufactures, promotes and provides after-sales services for aircraft, including MC-21 and Superjet 100.
Key assessment factors
The medium assessments of business profile and market position are explained by the high share of the contract base in the corporation's revenues (over three annual revenues), as well as the moderate level of cyclicality and saturation of the sales market, which is associated, on the one hand, with the need to upgrade the Russian air fleet, and, on the other hand, with the high competition and the prevalence of aircraft made by foreign aviation concerns in the fleet of Russian airlines. The assessment of the dependence on subcontracting and components includes the fact that the corporation develops and upgrades aircraft by its own design bureau, but to assemble aircraft, a significant number of third-party components is used. Diversification of sales markets is assessed as very high in view of export supplies, the share of which exceeds 50% in the corporation's revenue.
The medium level of corporate governance is due to the medium (for the Russian corporate segment) assessments of such sub-factors as management strategy and risk management framework. In these areas, the corporation has approved relevant procedures and identified decision-making and executive bodies. The corporation's strategy is an integral part of the national aviation industry development program implemented by UAC. The management structure is assessed as medium due to a high proportion of UAC representatives in the corporation's board of directors. The medium score for the group structure takes into account the corporation's subsidiaries and associates, as well as related-party transactions, although these transactions are economically justified. The financial transparency assessment takes into account the fact that Irkut publishes its consolidated IFRS financial statements on a regular basis.
The financial risk profile assessment is a constraining factor for the credit rating and it reflects the medium size of the corporation's business (the FFO before net interest and tax is below RUB 30 bln), high leverage (the ratio of total debt to FFO before net interest was 10.3x in 2020 versus 16.1x in 2019) and very low FCF (FCF margin was -20% in 2020). At the same time, it should be noted that the profitability is high: the ratio of FFO before interest and tax to revenue reached 16% in 2020 compared to 11% in 2019. ACRA expects that in 2021, the profitability will remain at the level of 2020, followed by a moderate increase to 19% in 2023, along with the growing production volume of civil aircraft.
The corporation's liquidity indicator is high, which is explained by the availability of free funds in the corporate accounts and the amount of undrawn bank credit lines.
The support from the state and UAC explains the additional three notches added to the SCA. ACRA takes into account the absence of legal, economic and other barriers to the provision of support to the corporation from both UAC and the state, and ACRA notes that Irkut performs, as a matter of priority, specific functions in support of the aviation industry having strategic importance for the state and participates in the implementation of national programs. From the viewpoint of social and economic effects, the corporation's role in the national economy is insignificant. The state has significant strategic control over the corporation and, through its representatives, participates in the coordination of Irkut's financial and strategic plans. The state has supported and continues to support the corporation, replenishing its capital and providing liquidity in an amount sufficient for the successful implementation of the corporation's development strategy.
Key assumptions
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The corporation's revenue and operating cash flow are in line with the plans for the forecast period of 2021–2023;
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The total volume of capital investments in 2021–2023 in accordance with the approved business plan;
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The average return on FFO before interest and tax at the level of about 17% in the forecast period;
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Further support from the state through concessional lending and additional capitalization.
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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The ratio of total debt to FFO before net interest declining below 5.0x, while the ratio of FFO before net interest to interest exceeding 5.0x;
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Positive FCF.
A negative rating action may be prompted by:
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The short-term liquidity ratio declining below 1.0x;
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The coverage declining below 2.5x.
Rating components
SCA: bbb.
Support: SCA plus three 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 for the Russian Federation, the Methodology for Analyzing Rated Entities Associated with a State or a Group and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities.
The credit rating has been assigned to Irkut Corporation for the first time. The credit rating of Irkut Corporation 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 Irkut Corporation, information from publicly available sources and ACRA’s own databases. The credit rating is solicited, and Irkut Corporation 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 Irkut Corporation. No conflicts of interest were identified in the course of credit rating assignment.
