Confirmation of the credit rating of JSC «UEC» (hereinafter, UEC, or the Corporation) reflects the preservation of the Corporation's credit metrics in the ranges established for this rating level, as well as the availability of government support.
The Standalone Creditworthiness Assessment (SCA) takes into account the medium market position of UEC, its strong business profile and geographic diversification, large size and high profitability. The SCA is constrained by medium leverage and debt service metrics, as well as 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).
KEY ASSESSMENT FACTORS
Government support explains the addition of three steps to USC. ACRA takes into account the absence of legal, economic and other barriers for state support to the Corporation and the fact that UEC participates in the implementation of state-run programs on a priority basis and performs dedicated functions in support of the aircraft engine building industry, which is strategically important for the state, and any disruption of the Company's business may affect product supply chains. The state has significant strategic control through the participation of Rostec representatives in the coordination of UEC's financial and strategic plans. The state has previously provided and continues to provide support to the Corporation in the form of additional capital and liquidity sufficient for the successful implementation of the UEC development strategy.
Strong business profile. UEC develops and manufactures aircraft engines to ensure national defense and security. The Corporation runs a full cycle of work: from fundamental research to product manufacturing and maintenance services. Regardless heightened risks and restrictions caused by the COVID-19 pandemic, the Corporation has maintained a stable portfolio of orders in both the domestic and international markets. The successful implementation of the MC-21 project with the PD-14 engine will have a significant positive impact on the UEC's portfolio of orders. Strong geographic diversification is based on the high share of exports in the Corporation's revenue.
Medium leverage. By the end of 2020, the ratio of total debt to FFO before net interest declined to 3.0x, which is due to the strong return on FFO before interest and taxes and the increased FFO before net interest. Taking into account the forecasted return on FFO before interest and taxes at 21% in the period from 2021 to 2023, ACRA expects that the ratio of total debt to FFO before net interest will be 3.3–3.5x in 2021–2022, and it will drop to 3.1x by 2023. The Corporation's loan portfolio is well diversified by lender, with some concentration on only the three largest of them. Part of the liabilities (about 20%) is denominated in foreign currency. The FFO before net interest to interest is expected at 3.7x in 2021 and should increase gradually to 5.3x by 2023.
Weak cash flow. The implementation of a large-scale investment program to develop new aircraft engines and to start the manufacture gas turbine equipment, as well as the annual payment of dividend, explain the fact that the Corporation's free cash flow is still in the negative zone. According to ACRA's projections, the FCF margin will be -11% in 2021; in 2022, it will grow to -9% and return to -12% in 2023.
KEY ASSUMPTIONS
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Attaining the expected revenue and operating cash flow metrics in the forecast period from 2021 to 2023;
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The total volume of capital investments in accordance with the approved business plan;
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Maintaining government support through concessional lending and further 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 2.0x;
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The ratio of FFO before net interest to interest exceeding 5.0x.
A negative rating action may be prompted by:
- The ratio of FFO before net interest to interest declining below 2.5x.
RATING COMPONENTS
SCA: a-.
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 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.
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 ancillary services to JSC «UEC». No conflicts of interest were identified in the course of credit rating assignment.
