The credit rating of TFN LLC (the Company, TFN) reflects the Company's medium business profile, geographical diversification and corporate governance, low leverage, and medium liquidity. Low profitability and cash flow, and smaller than medium size have remained the main rating-constraining factors.
The change in the outlook from Positive to Stable is due, on the one hand, to a decrease in FFO before interest and taxes margin in 2021, which caused the assessment for this sub-factor to remain low, and on the other hand, to an increase in the Company's need to finance its working capital (due to changes in the terms of settlements with suppliers), which led to an increase in the leverage and a decrease in the weighted debt service indicator.
The Company is a small, by the standards of the Russian corporate sector, trading entity focusing on communications equipment and mobile electronics, sunglasses and medical frames, as well as car security systems and car accessories. Thanks to its 65 regional offices, 54 warehouses, and 550 employees, the Company has a broad presence in the Russian market.
Key assessment factors
The medium assessment of the operational risk profile is determined by the low cyclical nature of the Company's core business, wholesale trade in communications and mobile electronics, which accounted for about 84.4% of revenue in 2021. The Company demonstrates a good diversification both by customer (the ten largest customers account for no more than 30% of receivables) and by supplier / manufacturer. In the current conditions of structural changes in the electronic equipment market, which began as a result of the departure of some foreign brands from Russia, the Company has managed to quickly replace those brands in its product portfolio, as well as to build relationships with suppliers through parallel imports. However, the new terms of delivery (including full prepayment coupled with deferred payments to TFN from its customers) give rise to the need for more working capital. The volume of export sales in the Company's revenue is insignificant, while the main market for the Company is the Russian Federation.
Low profitability and smaller-than-medium size. ACRA positively assesses the continued stable growth of FFO before net interest and taxes, which amounted to RUB 1,317 mln in 2021 against RUB 1,136 mln a year earlier. The FFO before interest and tax margin in 2021 was below the Agency's expectations and amounted to 4.1% versus 4.9% in 2020.
Low leverage and low coverage. The total debt burden of the Company increased by RUB 1.4 bln, which is reflected in the change in the ratio of long–term debt to FFO before fixed charges, which amounted to 2.0x by the end of 2021 versus 1.2x in 2020. At the same time, the ratio of short-term debt to revenue improved slightly (0.11x versus 0.13x a year earlier) on the back of a more impressive revenue growth. In the forecast period, the Agency expects an increase in the total debt burden to RUB 7 bln in view of the need to finance TFN's working capital. In this regard, the ratio of FFO before net interest to interest, which in 2021 amounted to 2.4x, is expected to be within 1.8x–2.0x in 2022–2023. The Company's debt is denominated in rubles and is represented by a bond loan, as well as by short-term floating-rate credit lines borrowed from three major Russian banks.
The medium liquidity assessment is based on the predominance of external funding sources. The Company has a sufficient amount of undrawn credit lines, and it also has the opportunity, if necessary, to enter the public debt market with a bond loan.
Negative FCF margin. Regardless that the margin has been in the negative area over the past three years, there is a trend for improvement: in 2021, the FCF margin amounted to -4.1% against -7.3% in 2020 and -11.5% in 2019. In the forecast period, ACRA expects the margin to remain negative.
Key assumptions
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Implementing the Company's revenue plan for 2022−2024.
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The average return on FFO before interest and taxes not lower than 4% in the forecast period.
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No dividend payments.
Potential outlook or rating change factors
The Stable outlook assumes that the rating will highly likely stay unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
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The FFO before interest and tax margin exceeding 5% and the ratio of FFO before net interest to interest exceeding 2.5x;
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The FCF margin exceeding 2%.
A negative rating action may be prompted by:
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The ratio of FFO before net interest to interest declining below 1.0x;
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The FFO before interest and tax margin declining below 2%.
Rating components
Standalone Creditworthiness Assessment (SCA): bb.
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 TFN LLC was published by ACRA for the first time on October 22, 2020. The credit rating of TFN LLC 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 TFN LLC, information from publicly available sources and ACRA’s own databases. The credit rating is solicited, and TFN 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 TFN LLC. No conflicts of interest were identified in the course of credit rating assignment.
