The credit rating of “Element Leasing” LLC (hereinafter, Element Leasing, or the Company) reflects the Company’s adequate business profile, strong capital adequacy, strong risk profile, and satisfactory funding and liquidity assessment.
Element Leasing is a leasing company focused on the financial lease of commercial-purpose vehicles, construction machinery and equipment mostly to small and medium-sized enterprises.
key ASSESSMENT factors
Adequate business profile. ACRA notes the Company’s strong competitive advantages and significant operational experience in the truck leasing business, which allows it to maintain its leading position in this segment. Element Leasing maintains its focus on business profitability and generation of revenues. Despite the significant fall of the volume of new business in Q2 2022, the Company has demonstrated a stable business model and growth of profits, and has also maintained its positions in niche segments, which besides trucks, also includes road construction equipment and special-purpose vehicles, buses and minibuses. As of September 30, 2022, Element Leasing’s lease portfolio amounted to RUB 16 bln, a 3% increase compared to 12 months ago, with the share of the car and truck segment at 61%, the share of the construction and special equipment segment at 12%, and the share of the bus segment at 11%. ACRA notes that the lease portfolio is still highly diversified by customer (the ten largest customers account for a 9% share) and geography of business. The quality of corporate governance and risk management is assessed as adequate.
Strong capital adequacy. For 9M 2022, the capital adequacy ratio (CAR) remained high at 24% (compared to 21% a year earlier). The averaged capital generation ratio (ACGR) has also grown and stood at 264 bps for the last five years. In accordance with ACRA’s criteria, the combination of these indicators results in the high assessment of the Company’s capital adequacy.
Strong risk profile assessment. ACRA notes that the Company has maintained the high quality of its lease portfolio, despite the harsh conditions in the economy over the past three years. As of the end of September 2022, the portfolio contained almost no lease contracts with payments overdue for 90+ days. In ACRA’s opinion, the share of potential problem receivables is less than 1%. Market and operational risks are insignificant.
Satisfactory funding and liquidity assessment. The capitalization of profits by the Company indicates an increase of equity, including as a source of funding. The Company’s funding sources are rather equally diversified between bonds (36% of liabilities as of September 30, 2022) and bank loans (30%). At the same time, ACRA notes that diversification by lender is moderately high, with the largest lender/five largest lenders occupying a 7%/25% share in the Company’s liabilities, respectively. The Company had two outstanding bond issues as of September 30, 2022. This year one of the previously placed issues was redeemed, and a new one was placed.
The Company has a comfortable liquidity position. In ACRA’s base case scenario (taking into account the Company’s new business growth plans), the Company retains an insignificant positive cash reserve in each calendar quarter in the 12 to 24-month horizon (the estimated liquidity ratio is around 1.0). In ACRA’s stress scenario, the liquidity shortage is substantial, but the Company’s area of focus allows it to manage cash flows by regulating the number of newly concluded lease contracts.
key assumptions
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Maintaining the current business model within the 12 to 18-month horizon;
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CAR of at least 15% within the 12 to 18-month horizon;
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Share of problem and potential problem lessees in the lease portfolio below 5%.
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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Considerably strengthened positions in the leasing market;
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Better diversification of sources of funding and individual creditors.
A negative rating action may be prompted by:
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Substantially lower CAR due to active business growth or higher cost of risk;
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Lower capital generation capacity;
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Material deterioration of the quality of the lease portfolio;
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Deterioration of the liquidity position.
RATING COMPONENTS
Standalone creditworthiness assessment (SCA): a-.
Adjustments: none.
Support: none.
issue ratings
“Element Leasing” LLC, 001P-03 series (RU000A102VW0), maturity date: March 19, 2024, issue volume: RUB 4 bln — А-(RU).
“Element Leasing” LLC, 001P-03 series (RU000A104ZH8), maturity date: July 23, 2024, issue volume: RUB 2 bln — А-(RU).
Rationale. The issues are senior unsecured debt instruments of Element Leasing. Due to the absence of either structural or contractual subordination of the issues, ACRA regards them as equal to other existing and future unsecured and unsubordinated debt obligations of the Company in terms of priority. According to ACRA’s methodology, the recovery rate for unsecured debt belongs to category I; therefore, the credit rating of the above issues is equivalent to that of “Element Leasing” LLC, i.e. A-(RU).
REGULATORY DISCLOSURE
The credit ratings have been assigned to “Element Leasing” LLC and the bonds issues of “Element Leasing” LLC (RU000A102VW0, RU000A104ZH8) 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 Methodology for Assigning Credit Ratings to Financial Instruments under the National Scale for the Russian Federation was also applied to assign credit ratings to the above issues.
The credit ratings of “Element Leasing” LLC and the bond issues of “Element Leasing” LLC (RU000A102VW0, RU000A104ZH8) were published by ACRA for the first time on January 19, 2018, March 23, 2021, and July 26, 2022, respectively. The credit rating of “Element Leasing” LLC and its outlook and the credit ratings of the aforementioned bond issues are expected to be revised within one year following the publication date of this press release.
The credit ratings were assigned based on data provided by “Element Leasing” LLC, information from publicly available sources, and ACRA’s own databases. The rating analysis was performed using the consolidated IFRS financial statements of “Element Leasing” LLC and the RAS financial statements of “Element Leasing” LLC. The credit ratings are solicited and “Element Leasing” LLC participated in their assignment.
In assigning the credit ratings, ACRA used only information, the quality and reliability of which were, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.
ACRA provided no additional services to “Element Leasing” LLC. No conflicts of interest were discovered in the course of credit rating assignment.
