The credit rating of JSC Concern Kalashnikov (hereinafter, Kalashnikov, the Company, or the Concern) has been upgraded due to an improvement of the debt service indicator. Besides this, the assessment of the Market Position sub-factor has improved, but at the same time, the assessments of the Diversification of Sales Markets and Financial Transparency sub-factors have worsened. 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 is a consequence of the low assessment of the Financial Transparency sub-factor, which was the result of identifying an error made by the auditor when preparing annual reporting. 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 the consistently high ratio of total debt to FFO before net interest payments and the 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. The financial transparency assessment has been reduced to low due to the identification of a technical error (below the materiality threshold according to IFRS standards) made by the Company’s auditor when preparing reporting for 2023.
Medium financial risk profile assessment. In 2023, the FFO margin before net interest payments and taxes was 18% vs. 20% in 2022. ACRA expects average profitability to be around 20% in the forecast period from 2024 to 2026. In 2023, the leverage ratio (ratio of total debt to FFO before net interest payments) increased to 5.9x compared to 3.9x in 2022, which was driven by absolute debt growing faster than 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) improved to 3.3x in 2023 vs 2.5x in 2022.
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. The Agency also notes a significant amount of unwithdrawn loan limits in banks and available credit lines.
Low FCF assessment. In 2022–2023, 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 remain negative in 2024 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 2025–2026 due to lower capital expenditures.
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 2024–2026.
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:
- Better assessment of the Financial Transparency sub-factor coupled with no auditor errors and the leverage indicator and debt/equity ratio falling below 3.5x and 2.0x, respectively.
A negative rating action may be prompted by:
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Lower assessment of the Financial Transparency sub-factor due to errors made when compiling reporting;
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Leverage indicator exceeding 5.0x;
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Debt service indicator falling below 2.5x.
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-P02 (RU000A0ZZTK7), maturity date: November 2, 2028, issue volume: 5 bln — A+(RU).
Rationale. The issue is a senior unsecured debt instrument of Joint Stock Company “TransKomplektHolding”, the parent company of JSC Concern Kalashnikov. The credit rating was 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 issue, ACRA regards it as equal to the Offeror’s other unsecured and unsubordinated debt obligations in terms of priority. As per its methodology, ACRA applied the detailed approach. According to ACRA’s assessment, the recovery rate for unsecured debt belongs to the second category, and therefore the credit rating of the issue is 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 issue (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 the credit rating to the above issue.
The credit ratings of JSC Concern Kalashnikov and the bond issue (RU000A0ZZTK7) of Joint Stock Company “TransKomplektHolding” were published by ACRA for the first time on August 16, 2017 and November 15, 2018, respectively. The credit rating of JSC Concern Kalashnikov and its outlook and the credit rating of the bond issue (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.
Disclosure of deviations from approved methodologies: deviation from the Methodology for Credit Ratings Assignment to Non-Financial Corporations under the National Scale for the Russian Federation. When conducting the rating analysis, the Financial Transparency sub-factor was assigned a score of 4 points instead of 5 due to the fact that the error made by the auditor in the rated entity’s reporting is of a technical nature.
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.
The decision to upgrade the rating of JSC Concern Kalashnikov to A+(RU) and change the outlook to Stable and upgrade its bond issue (RU000A0ZZTK7) to A+(RU) was made at a repeat meeting of the rating committee, taking into account ACRA’s review of an external appeal against the decision of the rating committee to affirm A(RU), outlook Positive, to the credit rating of JSC Concern Kalashnikov, and affirm A(RU) to its bond issue (RU000A0ZZTK7). The external appeal was filed taking into account the Company’s arguments about the immaterial impact of the auditor’s error on the Company’s results.
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.
