The outlook for the credit rating of JSC Concern Kalashnikov (hereinafter, Kalashnikov, the Company, or the Concern) has been changed to Positive due to growth of the FFO margin before interest and taxes in 2022 and the expectation that it will be maintained at this level in 2023, which may have a positive impact on coverage.
The Company’s credit rating has been determined taking into account state support, in the form of one notch being added to the Company’s standalone creditworthiness assessment (SCA). The Concern’s SCA is based on its strong market position, as Kalashnikov is the leader of the firearms segment, and strong business profile. The medium corporate governance assessment has a neutral impact on the Company’s rating. The financial risk profile assessment is a reflection of the Company’s high profitability and strong liquidity position. The financial risk profile assessment, and consequently the Company’s rating, are constrained by high leverage, low coverage, and a low free cash flow (FCF) assessment, taking into account the restrictions for working on state defense orders.
Kalashnikov is Russia’s largest manufacturer of firearms, the main supplier of small arms to the Russian Armed Forces, and controls the manufacture of high-precision guided weapons for army aviation. The Kalashnikov brand is well known around the globe; the geographic diversification of Company’s supplies of military products is wide.
KEY ASSESSMENT FACTORS
Strong business profile and market position. The Company is the leader of the Russian firearms industry and an integral part of the entire firearms sector of Russia’s defense industry. The Concern produces more than 95% of small arms in Russia. The Concern’s product portfolio includes a wide range of military and civilian firearms, high-precision equipment, test vehicles, robotic products, and air cannons. The Company has a complete portfolio of orders for the forthcoming years, especially taking into account large contracts with the Russian Ministry of Defense.
The medium level of corporate governance is due to the high assessment of the management strategy as part of a public-private partnership. The Company’s development strategy provides for sustainable growth of its revenues based on further expansion of the product range and development of prospective lines of business. The Agency notes that the Concern has established an effective risk management system aimed at business sustainability and profitability. The Company’s structure is rather complicated but it matches the scale of its business. Financial transparency is acceptable, taking into account the confidential nature of the Concern’s activities.
The financial risk profile assessment is a result of high profitability, medium size of business, low debt service indicators, and high leverage. In 2022, the FFO margin before net interest payments and taxes exceeded 20% vs. 13% in 2021. ACRA expects average profitability to be around 15% in the forecast period from 2023 to 2025. In 2022, the leverage ratio (ratio of total debt to FFO before net interest payments) declined to 3.9x compared to 7.1x in 2021, which was driven by higher operating profits. According to the Agency’s assessments, the leverage ratio will decline in the forecast period, but the rate at which it declines will depend heavily on the conditions for settlements under state defense orders. In its qualitative assessment of the Company’s debt portfolio, ACRA took into account the specific nature of the portion of the portfolio that is associated with state defense orders. Coverage (FFO before net interest payments to interest payments) was 2.5x in 2022 compared to 2.0x in 2021. ACRA assumes that if profitability remains at a level of at least 15% in 2023, the weighted debt service ratio may exceed 2.5x and serve as a factor for revising the Company’s credit rating.
The high liquidity stems from the comfortable terms of payment for its products. The Agency notes that defense sector payment regulations imply strict targeted use of advance payments, therefore, not all cash was taken into account by ACRA in its calculations of liquidity. The Agency also notes a significant amount of unwithdrawn loan limits in banks and available credit lines.
In 2022, the Company’s FCF was negative in view of the specifics of the financing of key state defense order contracts and the provision of subsidized lending. ACRA assumes that FCF will be around zero or just below zero due to higher investments in working capital (taking into account allocated state subsidies to compensate investment costs). The Company’s FCF should largely remain positive in 2024–2025.
KEY ASSUMPTIONS
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Complete performance of current contracts in the forecast period;
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Investment program in line with the Company’s business plan;
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No dividend payments in 2023–2025.
POTENTIAL OUTLOOK OR RATING CHANGE FACTORS
The Positive outlook assumes that the rating will highly likely be upgraded within the 12 to 18-month horizon.
A positive rating action may be prompted by:
- Coverage (FFO before net interest payments to interest payments) exceeding 2.5x coupled with the FFO margin before interest and taxes maintained above 15%.
A negative rating action may be prompted by:
- Ratio of capital expenditures to revenues increasing above 5% coupled with the FFO margin before interest and taxes decreasing below 15%.
RATING COMPONENTS
SCA: a-.
Support: SCA plus one notch.
ISSUE RATINGS
JSC “TransKomplektHolding”, exchange-traded interest-bearing certificated non-convertible bearer bond subject to centralized title registration, series BO-P01 (RU000A0ZYCR1), maturity date: September 30, 2027, issue volume: RUB 7 bln — A(RU).
JSC “TransKomplektHolding”, exchange-traded interest-bearing certificated non-convertible bearer bond subject to centralized title registration, series BO-P02 (RU000A0ZZTK7), maturity date: November 2, 2028, issue volume: 5 bln — A(RU).
Rationale. The issues are senior unsecured debt instruments of Joint Stock Company “TransKomplektHolding”, the parent company of JSC Concern Kalashnikov. The credit ratings were affirmed based on the issue documentation and an irrevocable public offer, according to which, in case of the issuer’s default, JSC Concern Kalashnikov (the Offeror) will repurchase the bonds, including accrued coupon yield.
Due to the absence of either structural or contractual subordination of the issues, ACRA regards them as pari passu to other unsecured and unsubordinated debt obligations of the Offeror. In line with its methodology, ACRA applied the detailed approach. According to ACRA’s assessment, the recovery rate for unsecured debt belongs to the first category, and therefore the credit ratings of the issues are the same as the credit rating assigned to the Offeror.
REGULATORY DISCLOSURE
The credit ratings have been assigned to JSC Concern Kalashnikov and the bond issues (RU000A0ZYCR1, RU000A0ZZTK7) of Joint Stock Company “TransKomplektHolding” 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, 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 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 JSC Concern Kalashnikov and the bond issues (RU000A0ZYCR1, RU000A0ZZTK7) of Joint Stock Company “TransKomplektHolding” were published by ACRA for the first time on August 16, 2017, October 11, 2017, and November 15, 2018, respectively. The credit rating of JSC Concern Kalashnikov and its outlook and the credit ratings of the bond issues (RU000A0ZYCR1, RU000A0ZZTK7) of Joint Stock Company “TransKomplektHolding” 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 JSC Concern Kalashnikov, information from publicly available sources, and ACRA’s own databases. The credit ratings are solicited and JSC Concern Kalashnikov 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 JSC Concern Kalashnikov and Joint stock company “TransKomplektHolding”. No conflicts of interest were discovered in the course of credit rating assignment.
