The credit rating of "Element Leasing" LLC (the Company) is based on 'adequate' assessments of business profile and capital adequacy, 'strong' risk profile and 'satisfactory' assessment of funding and liquidity. The Company's creditworthiness is 'moderately high' as compared to Russian peers.
The Company is a specialized lease company focused on the financial lease in transportation means, preferably, trucks and minibuses. According to the IFRS statements of the Company, the controlling beneficiary is Ms. T. Polyakova who owns 81% share in the Company.
Key rating assessment factors
Adequate business profile. ACRA notes strong competitive advantages and significant operational experience of the Company in the field of truck leasing, which allows the Company to consistently be among the leaders in this segment. The Company's specialization increases the sensitivity of its new business and market positions to the demand for commercial vehicles, however this is offset by the high diversification of its lease portfolio by customer and the relatively high liquidity of this type of property. The quality of corporate governance and risk management is considered by ACRA as 'adequate'.
Comfortable loss absorption buffer is combined with moderate possibilities for internal generation of capital. The Company has a sound capital reserve: at the end of September 2017, the capital adequacy ratio (CAR) was 15.3%. The Company's own capital generation capabilities are estimated as moderate: the average capital generation ratio (ACGR) is estimated at 80-90 bps for 2013-2017. Taking into account the financial performance of the Company in 2016–2017, we expect that ACGR will grow further.
High quality of lease portfolio. Motor vehicle leasing specialization allowed the Company to avoid losses seen in the leasing market as a whole in periods of economic recession. At the same time, the efficiency of managing distressed debts is estimated as quite high. As of the end of September, 2017, the share of leasing contracts with payments overdue for 30+ days was 5.6%, 90+ days – 1.4%, and about 1.4% of the leasing portfolio was restructured. There is no securities portfolio. The magnitude of market and operational risk is considered insignificant.
Concentrated funding structure. The Company's liabilities mainly include bank loans (50%) and debt securities (27%). At the same time, a significant share (63% as of September 30, 2017) of the issued bonds is owned by a small group of persons having long-term multilateral business relations with the Company. The share of the top five lenders (excluding the above-mentioned group of persons) is estimated as satisfactory (39%).
Satisfactory liquidity position. In the base case scenario of ACRA (taking into account the Company's growth plans in a new business), the Company shows an insignificant positive cash reserve in each calendar quarter on the 12 to 24-months horizon (the estimated liquidity ratio is slightly above 1.0). In the stress scenario of ACRA, the liquidity shortage is substantial, but the Company's specialization allows it to manage cash flows by regulating the number of newly concluded lease contracts. The terms of the issued bonds provide for an offer in April and June 2018, but, as the issues are concentrated within the small group of persons having long-term business relations with the Company, the likelihood of early redemption of such bonds is estimated by ACRA as quite low. The Company has plans to refinance existing bond issues in full after the RUB 5 billion bond issue expected to be closed by the end of 1Q2018.
Key assumptions
- No changes to the business model within the 12 to 18-month horizon;
- CAR of at least 12% within the 12 to 18-month horizon;
- The share of lease contracts with overdue payments below 5%.
Potential outlook or rating change factors
The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
- A substantial growth in the CAR and internal capital generation;
- Decreasing concentration of the funding profile;
- Increasing diversification of the lease portfolio by type of property.
A negative rating action may be prompted by:
- A substantial decrease in the CAR due to active business growth or risk costs increase;
- Substantially deteriorating quality of the lease portfolio;
- Deteriorating liquidity position.
Rating components
Standalone creditworthiness assessment (SCA): bbb+.
Adjustments: no.
Support: no.
Issue ratings
No outstanding issues have been rated.
Regulatory disclosure
The credit rating has been assigned under the national scale for the Russian Federation and is based on the Methodology for Credit Ratings Assignment to Leasing Companies Under the National Scale for the Russian Federation, the Methodology for Analyzing Relationships Between Rated Entities and the State, and the Key Concepts Used by Analytical Credit Rating Agency Within the Scope of Its Rating Activities.
A credit rating has been assigned to "Element Leasing" LLC for the first time. The credit rating and credit rating outlook are expected to be revised within one year following the rating action (January 17, 2018).
The assigned credit rating is based on the data provided by "Element Leasing" LLC, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using IFRS consolidated statements of "Element Leasing" LLC and statements of "Element Leasing" LLC composed in compliance with RAS. The credit rating is solicited, and "Element Leasing" LLC participated in its assignment.
No material discrepancies between the provided data and the data officially disclosed by "Element Leasing" LLC in its financial statements have been discovered.
ACRA provided no additional services to "Element Leasing" LLC. No conflicts of interest were discovered in the course of credit rating assignment.
