The credit rating of “Element Leasing” LLC (hereinafter, Element Leasing, or the Company) has been upgraded due to the higher assessment of the Funding and Liquidity factor amid the Company maintaining strong assessments of capital adequacy and the risk profile, as well as an adequate business profile 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 assessment. 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, consistently delivering strong results in terms of the volume of signed contracts. The Company’s lease portfolio grew by 19% in H1 2023. At the same time, its structure by types of lease object is generally the same as the structure last year, with the share of the car and truck segment at 59%, the share of the construction and other special equipment segment at 13%, and the share of the bus segment at 10%. A large number of minor contracts in the highly liquid segment allow the Company to manage its cash flows, maintaining business profitability and a balance between assets and liabilities. ACRA notes that the lease portfolio is still highly diversified by clients (the largest client accounts for no more than a 1.5% share and the ten largest clients account for a 10% share) and geography of business. The quality of corporate governance and risk management is assessed as adequate.

Strong capital adequacy. As of the end of H1 2023, the capital adequacy ratio (CAR) remained high at 20.4% (compared to 24% as of last year’s analysis). The averaged capital generation ratio (ACGR) stood at 285 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. As of the end of H1 2023, 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.

Adequate funding and liquidity assessment Element Leasing’s funding sources are diversified between bank loans and bonds, which amounted to 45% and 28% of liabilities, respectively, as of June 30, 2023. The Company’s two bond issues in July and October 2023 have almost equalized the share of these sources to date. At the same time, ACRA notes that diversification by lender has declined (the share of the largest lender increased to 14% of the Company’s liabilities, while the share of the five largest lenders has declined to 42%).

The increase in the assessment of liquidity, which influences the Funding and Liquidity factor, is facilitated by the Company’s liquidity management, which is confirmed by the absence of the need to refinance financial obligations in the next 24 months and peak debt repayments, as well as the ability to cover obligations with income from current business even in the event of a significant reduction in revenues from new contracts. In ACRA’s base case scenario (taking into account the Company’s new business growth plans), the Company retains a positive cash reserve in each calendar quarter over the next 12 to 24-months (the estimated liquidity ratio over the 24-month horizon is around 1.02). No liquidity shortage is projected in the stress scenario. The Company’s area of focus allows it to manage cash flows by regulating the number of newly concluded lease contracts.

KEY ASSUMPTIONS

  • Maintaining the current business model within the 12 to 18-month horizon;

  • CAR of at least 15% within the 12 to 18-month horizon;

  • 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:

  • Considerably strengthened positions in the leasing market;

  • Better diversification of sources of funding and individual creditors.

A negative rating action may be prompted by:

  • Substantially lower CAR due to active business growth or higher cost of risk;

  • Lower capital generation capacity;

  • Material deterioration of the quality of the lease portfolio;

  • 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, 01A series (RU000A104ZH8), maturity date: July 23, 2024, issue volume: RUB 2 bln — А(RU).

“Element Leasing” LLC, 001P-04 series (RU000A105V74), maturity date: January 31, 2026, issue volume: RUB 2 bln — А(RU).

“Element Leasing” LLC, 001P-05 series (RU000A106KW4), maturity date: July 4, 2026, issue volume: RUB 3 bln — А(RU).

“Element Leasing” LLC, 001P-06 series (RU000A1071U9), maturity date: October 2, 2026, issue volume: RUB 2.5 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 II; 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, RU000A105V74, RU000A106KW4, RU000A1071U9) 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, RU000A105V74, RU000A106KW4, RU000A1071U9) were published by ACRA for the first time on January 19, 2018, March 23, 2021, July 26, 2022, February 16, 2023, July 20, 2023, and October 18, 2023, 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 additional services to “Element Leasing” LLC. No conflicts of interest were discovered in the course of credit rating assignment.

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