The credit rating of “GEN LEASING” LLC (hereinafter, Gen Leasing, or 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. High concentration on certain counterparties, in terms of both assets and liabilities, is likely to continue to have a restraining effect on the rating in 2022–2023. According to ACRA’s methodology, the rating reflects the Company’s weak business profile, strong capital adequacy, adequate risk profile, and weak funding and liquidity.
Gen Leasing is a small leasing company that has been operating exclusively in the Crimean peninsula (mainly in Simferopol, the Bakhchisaray District, and Sevastopol) since September 2014. It leases equipment, special-purpose vehicles and trucks mainly for the agricultural and food industries, 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 to the business model in the next 12–18 months.
key assessment factors
The weak business profile assessment takes into account the relatively small size of Gen Leasing that determines its relatively low business diversification (which has deteriorated slightly over the past 12 months: the 10 largest lessees account for about 70% of the portfolio compared to 54% a year earlier, while the 30 largest lessees account for about 88% vs. 80% for the same period) and is the source of, in ACRA’s opinion, potential vulnerability to a changing competitive environment.
In addition, the historical volatility and level of concentration of the resource base continues to limit the business stability assessment — since 2014, the operating environment in the peninsula has been characterized by an insufficient supply of high-quality credit facilities from the banking industry.
Despite the fact that Gen Leasing is working to increase its number of funding sources, concentration remains rather significant. Risks are somewhat mitigated by well-established partnerships with a number of banks. Significant improvement of the accessibility of financing in the region as major financial institutions begin to locally launch operations may have a favorable impact on the Company’s rating.
On the other hand, tougher competition in the future, as new players begin to appear in the region, may limit the Company’s market positions. Gen Leasing’s services currently enjoy strong demand since historically, due to sanctions risks, there have been no strong competitors in the region such as other leasing companies or large banks that provide similar services and have well-established market positions in mainland Russia.
The Company benefits from the preferential tax regime established in Crimea.
The strong assessment of capitalization and profitability is based on the historically high capital adequacy ratio (CAR), which stood at 23% at the end of September 2022, having declined from 30% a year earlier. This result is due to substantial (57%) growth of the lease portfolio over 9M 2022. The Agency does not expect any significant decline of the CAR over the next 12–18 months, and takes into account the Company’s dividend payments of 5–8% of net profits, as well as further potential uneven growth of business due to the concentrated nature of operations.
On average, Gen Leasing has demonstrated comfortably strong financial performance: the averaged capital generation ratio (ACGR) amounted to 893 bps for 2017–2021. In line with the Agency’s expectations, the Company was able to adapt to the loss of a key creditor in April 2021 and return to growth after recording neutral performance in 2021, which was reflected in the results of operations accordingly. The return on average equity was 36% in annual terms for the first three quarters of last year vs. 10% in the same period in 2021.
Adequate risk profile assessment. According to the Agency’s estimates, the share of non-performing assets is less than 5% of the Company’s lease portfolio, having declined from roughly 8% a year earlier. This improvement, among other things, is due to the sale to a third party of a significant part of distressed claims, coupled with the rapid growth of the leasing portfolio last year. At the same time, ACRA notes that a significant part of new business was driven by clients who are expanding their presence in regions of the Russian Federation, which, in the Agency’s opinion, are characterized by higher credit risks. Therefore, additional credit risks cannot be ruled out as the portfolio matures in the next 12–18 months.
The still low penetration of credit and leasing services in the Crimean Peninsula, along with persistent demand for these products, continues to help the Company select the highest quality lessees. When making leasing decisions, Gen Leasing relies primarily on the estimated creditworthiness of its customers and only later analyzes the liquidity of the leasing object, which, in ACRA’s opinion, favorably distinguishes the Company from many other representatives of the retail leasing industry.
Weak funding and liquidity position. The main factors holding back the assessment include the narrow funding base and past disruptions in the operations of key lending banks that in general are rather scarce in the region. As of the end of September 2022, the five largest lenders formed the core of the Company’s liabilities, or about 66% of its balance sheet; an additional 23% is the Company’s own funds. In the coming year, Gen Leasing plans to diversify its funding sources and strengthen the stability of its resource base due to new banks launching operations in the region and its debt bond issue worth approximately RUB 200 mln. Financial market uncertainty 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 base case scenario, will exceed 1.0x. In the stress scenario (which envisages cash flow from lessees falling by 20%), the need to raise emergency liquidity could be offset by a suspension of operations.
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%.
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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Significant increase of business diversification and scale;
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Stabilization of the downward trend of the share of non-performing leases.
A negative rating action may be prompted by:
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Worse financial sustainability of the largest lessees;
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Significant decline of the CAR due to faster growth of business and/or emergence of credit costs;
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Destabilization of operations following the loss or weakening of key business partners;
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Weaker liquidity position.
RATING COMPONENTS
Standalone creditworthiness assessment (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 of “GEN LEASING” LLC was published by ACRA for the first time on March 2, 2022. 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 data provided by “GEN LEASING” LLC, information from publicly available sources, and 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 were, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.
ACRA provided no additional services to "GEN LEASING" LLC. No conflicts of interest were discovered in the course of credit rating assignment.
