The credit rating of "GEN LEASING" LLC (hereinafter, Gen Leasing, the Company) reflects ACRA's expectations that in the next 12–18 months the Company will continue to provide leasing services in the Crimean peninsula, remaining a notable local player and maintaining high capital adequacy metrics. A high concentration on certain counterparties, in terms of both assets and liabilities, is likely to continue to have a restraining effect on the credit rating in 2022–2023. According to ACRA's methodology, the credit rating reflects the Company's weak business profile, strong capital adequacy, adequate risk profile, and weak funding and liquidity.
Gen Leasing LLC is a small leasing company that has been operating exclusively on the Crimean peninsula (mainly in Simferopol, Bakhchisaray District and Sevastopol) since September 2014; it leases equipment, special-purpose vehicles and trucks mainly for the agricultural and food industry, road construction and maintenance companies, as well as for the segment of extraction, processing and transportation of inert materials. ACRA does not expect fundamental changes in the business model in the next 12–18 months. V. Kosenko is the sole owner of the Company who also holds the position of the board chairman and determines the corporate strategy.
KEY ASSESSMENT FACTORS
The weak business profile assessment takes into account the relatively small size of the Company, which determines a relatively low business diversification (the top 10 lessees account for about 54% of the portfolio, and 30 lessees — for about 80%) and potential vulnerability to the external environment, as per the ACRA’s opinion. In addition, the volatility and concentration of the funding base limit the business sustainability, and are caused by an insufficient offer of stable credit resources fr om the banking industry on the peninsula. For example, the revocation in April 2021 of the banking license of the one of the major lenders of the Company explains its slow development over the first nine months of 2021. ACRA's conclusions are further supported by a shrink in the Company's scope of business in 2017–2018 against the background of the rehabilitation of GENBANK JSC, another key partner bank that is still operating today.
On the other hand, the Company's services are in strong demand since, due to sanctions risks, there are no strong competitors in the region like other large leasing companies and banks that do provide similar services and have stable well-established market positions in the Russian mainland. Therefore, the Company is viewed as a local industry leader.
Historically, the specifics of the region wh ere the Company operates make doing business somewhat difficult, but the Agency believes that Gen Leasing has adapted to such conditions. The Company also benefits fr om the preferential tax regime established in the Crimea.
The strong assessment of capitalization and returns is based on the historically high capital adequacy ratio (CAR), which stood at 30% at the end of September 2021, and the Agency’s expectations that there will be no significant decline in the CAR over the next 12–18 months. In its estimates, ACRA takes into account the Company's dividend payments of 5–8% of net profits and a potential uneven growth of the leasing portfolio due to the concentrated nature of the business, which, among other things, will depend on the success in increasing the number of funding sources.
On average, the Company has demonstrated a comfortably strong financial performance: the average capital generation ratio (ACGR) for 2016–2020 amounted to 905 bps. At the same time, profitability metrics declined significantly in the first nine months of 2021 compared to historical performance, largely due to the lack of business growth following the loss of a major lender. The return on average equity was 10% in annual terms for the first three quarters of last year against 30–40% in 2019–2020. In the period from 2022 to 2023, ACRA expects the return to recover to the levels that will be more comparable to those of 2019–2020 as the Company adapts to the loss of one of its key lenders, which banking license was withdrawn in April 2021. This scenario assumes the Company's return to the business growth trajectory.
Adequate risk profile assessment. According to the Agency's estimates, the share of non-performing assets is about 8% of the Company's leasing portfolio. 70–75% of this share is covered by impairment provisions, which mitigates the risks to some extent. In ACRA's opinion, the low penetration of credit and leasing services in the region, along with a significant demand for these products, helps the Company sel ect the relatively high quality lessees. When making leasing decisions, the Company relies primarily on the estimated creditworthiness of its customers rather than assessment of liquidity of the leasing object, which, in ACRA's opinion, is beneficial to the Company in contrast to many other retail leasing companies.
Weak funding and liquidity position. The main factors holding back the assessment include the narrow funding base and past disruptions in the business of key lending banks that in general are rather scarce in the region. As of September 30, 2021, the five largest lenders formed the core of the Company's liabilities, or about 63% of the balance sheet; additional 30% is the Company's own funds. In the coming year, the Company is expected to make a debut bond issuance for approximately RUB 200 mln, which will contribute to a more stable funding structure. An increase in the financial market volatility may hinder a successful issuance.
ACRA does not expect fundamental changes in the Company's liquidity management over the next 12–18 months; during this period, the current liquidity ratio, according to the Agency's forecasts, will exceed 1.0x. In the stress scenario, the need to raise emergency liquidity could be offset by a suspension of operations.
KEY ASSUMPTIONS
-
Maintaining the current business model within the 12 to 18-month horizon.
-
CAR of at least 15%.
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:
-
A significant increase in the business diversification and scale;
-
Signs of a sustainable decline in the share of non-performing leases.
A negative rating action may be prompted by:
-
Worse financial sustainability of the largest lessees;
-
A significant decline in the loss absorption ability due to significantly faster growth of business and/or emergence of credit costs;
-
Another destabilization of operations following the loss or weakening of key business partners;
-
Signs of a weaker liquidity position;
-
Materialization of risks associated with the specifics of the region wh ere the Company operates.
RATING COMPONENTS
SCA: bb+.
Adjustments: none.
Support: none.
ISSUE RATINGS
No outstanding issues have been rated.
REGULATORY DISCLOSURE
The credit rating has been assigned to "GEN LEASING" LLC under the national scale for the Russian Federation based on the Methodology for Assigning Credit Ratings to Leasing Companies on 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 has been assigned to "GEN LEASING" LLC for the first time. The credit rating of "GEN LEASING" LLC and its outlook is 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 "GEN LEASING" LLC, information fr om publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using the RAS financial statements of "GEN LEASING" LLC. The credit rating is solicited, and "GEN LEASING" 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 ancillary services to "GEN LEASING" LLC. No conflicts of interest were identified in the course of credit rating assignment.
