The credit rating of X Holding LLC (hereinafter, X Holding, the Holding, or the Company) has been upgraded due to an improved assessments of business diversification and product uniqueness, as well as the Company’s approaches to liquidity management, which led to an increase in the corresponding qualitative and quantitative assessments. In addition, the Holding is characterized by a strong operational risk profile, which is supported by a very strong business profile, strong market position and very high geographic diversification. The moderate assessment of the financial risk profile is based on medium leverage and debt service metrics, strong liquidity, and large business size. The level of profitability also has a positive impact on the assessment, while the negative free cash flow due to the Company’s significant investments in developing its product line puts pressure on the assessment.

The outlook has been changed from Stable to Positive to reflect the Agency’s expectations of an improvement of X Holding’s leverage and debt service.

X Holding is a multi-profile IT group whose main assets include: sub-holding Yadro, which produces server platforms, data storage systems (DSSs), telecommunications and other equipment; Citadel, a leader of the Russian market of hardware and software solutions for law enforcement surveillance; Garda, an information security software provider; and Cryptonit, the scientific and technical center of the Holding, which develops special technical means and telecommunications equipment for special needs.

KEY ASSESSMENT FACTORS

The high assessment of the operational risk profile is based on a strong market position — the Company is a leader in the moderately concentrated server and DSS markets in Russia, occupying about a third of each of them, while the Citadel sub-holding is the leader in the market of hardware and software solutions for law enforcement surveillance, which has a high level of concentration.

The Agency assesses the volatility of demand for the Holding’s key products in the medium term as low due to low market saturation as a result of vacated niches following the departure of foreign companies, the presence of regulatory requirements for the use of domestic software and equipment in certain industries, as well as the general trend toward digitalization leading to a growing need for computing power.

The Agency has improved the assessments of the diversification of business and the uniqueness of the Company’s products to very high against the backdrop of the formation of a stable cash flow from several key unique products belonging to different business segments (servers, DSSs and hardware and software solutions for law enforcement surveillance), the share of each of which does not exceed 35% of the Holding’s revenues. At the same time, ACRA expects a further increase in product diversification with the start of sales of significant volumes of telecommunications equipment (base stations).

Profitability and business size support the financial profile assessment. According to ACRA’s model, the weighted average value of FFO before fixed payments and taxes will be RUB 53 bln from 2021 to 2026. The weighted average FFO margin before fixed payments and taxes for the specified period remains 30%, which corresponds to the highest estimate as per ACRA’s methodology. The Agency does not expect this indictor to decline below the aforementioned level.

Medium leverage and debt service indicators. According to ACRA’s estimates, the weighted average ratio of adjusted total debt to FFO before fixed payments for 2021–2026 will be 2.2x. The Agency expects this indicator to continue to decline in 2024, and drop below 2.0x by the end of 2025. The Company’s loan portfolio is mainly formed by bank loans.

The weighted average ratio of FFO before fixed payments to fixed payments decreased to 5.5x compared to the previous rating action, which led to a deterioration in the assessment of this factor. The decrease in debt servicing is due to an increase in the volume of debt raised at market rates (previously, a significant portion of debt was raised at subsidized rates). ACRA expects that as this debt is repaid, the ratio of FFO before fixed payments to fixed payments may exceed 6.0x in 2025–2026.

The Agency’s expectations regarding a reduction in leverage and an increase in the coverage of fixed payments have been reflected in the change in the rating outlook to Positive.

High liquidity and negative free cash flow. The Agency noted the Holding’s work to optimize liquidity management, which made it possible to extend lending terms and significantly increase available credit limits. According to ACRA’s estimates, the weighted average short-term liquidity ratio will be 2.8x.

FCF profitability remains negative due to considerable investments — the Agency expects the weighted average for the analyzed period to be -7%, with a transition to positive values ​​from 2026.

According to ACRA’s estimates, the Holding will maintain a high level of capital expenditures in connection with the implementation of the project to develop telecommunications equipment. The weighted average ratio of capital costs to revenues will be 15%.

KEY ASSUMPTIONS

  • FFO before fixed payments and taxes growing within 16–30% in 2024–2026;

  • Maintaining the FFO before fixed payments and taxes margin within 30–35% in 2024–2026;

  • Capital expenditures at RUB 30–35 bln in 2024–2026.

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:

  • Ratio of weighted average adjusted total debt to FFO before fixed payments consistently below 2.0x coupled with ratio of FFO before fixed payments to fixed payments growing much higher than 6.0х;

  • Ratio of the weighted average FCF margin higher than 2%;

  • Significant improvement of corporate governance practices and financial transparency.

A negative rating action may be prompted by:

  • Ratio of weighted average adjusted total debt to FFO before fixed payments exceeding 3.5х coupled with weighted average ratio of FFO before fixed payments to fixed payments falling below 3.0x without the possibility of fast recovery;

  • Weighted average FFO margin before fixed payments and taxes declining below 20%;

  • Significant decline of liquidity where the short-term liquidity ratio is lower than 1.0x.

rating components

Standalone creditworthiness assessment (SCA): a+.

Support: none.

issue ratings

There are no outstanding issues.

regulatory disclosure

The credit rating has been assigned to X Holding LLC 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 X Holding LLC was published by ACRA for the first time on June 28, 2023. 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 X Holding LLC, information from publicly available sources, and ACRA’s own databases. The credit rating was assigned based on the IFRS financial statements of X Holding LLC. The credit rating is solicited and X Holding 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 additional services to X Holding LLC. No conflicts of interest were discovered in the course of credit rating assignment.

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