The credit rating of JSC VEB-leasing (hereinafter, VEB-leasing, or the Company) is equal to the rating of the supporting institution, State Corporation “Bank for Development and Foreign Economic Affairs (Vnesheconombank)”, i.e. AAA(RU) and is based on very high probability of extraordinary support from the supporting institution and indirectly from the Russian Government (through Vnesheconombank).
At the same time, the relatively low standalone creditworthiness assessment (SCA) of the Company at ‘bb-’ (including one notch adjustment) stems from significant concentration of the lease portfolio, low capital adequacy ratios as well as low risk profile assessment of the Company, which is partially offset by adequate funding and liquidity indicators. The ultimate SCA also incorporates a positive one-notch adjustment resulting from the Company’s competitive advantage (see below).
VEB-leasing is a specialized leasing company focused on providing financial and operational lease services covering air, railroad, water, and motor transport as well as related equipment. The Company is fully owned and controlled by Vnesheconombank (hereinafter, VEB), which in turn constitutes a state development institution under the Russian Government. As a member of VEB Group, the Company acts as an implementation tool for the state policy for developing the priority industries of the national economy, in particular, transport and infrastructure sectors.
According to the data provided by the Company, VEB-leasing ranks fourth in terms of the lease portfolio size and third in terms of new business; it is among the leaders in key business areas.
Key rating assessment factors
Very high probability of support from Vnesheconombank and the Russian Government is based on the significant role of VEB-leasing in VEB’s strategy implementation, in particular, in supporting the priority industries of the Russian economy. The Company is deeply integrated into VEB Group; function control over VEB-leasing activities is currently exercised at the group level to a large extent. Integration at the group level involves single risk management, treasury, information systems, etc.
Cross-default provisions in some of Vnesheconombank’s debt obligations are another key factor, according to which a default or dissolution of VEB-leasing constitute an event of default for Vnesheconombank as well. ACRA also notes that VEB provided guarantees and suretyships with respect to some leasing projects implemented by the Company. Multiple capital injections in the recent years provided by VEB for the purposes of creating provisions and maintaining capital adequacy constitute a positive factor indicative of the Company’s importance for the Group and the state.
Adequate business profile is based on strong positions of VEB-leasing in the leasing market in general, and in the segment of transportation means leasing. At the same time, the Company’s lease portfolio is largely concentrated on several largest leaseholders: As at end-2017, the top ten clients accounted for 89% of contracts in the lease portfolio. Concentration on leasing subject classesis also relatively high as leasing of air and railroad transport prevails in the Company’s portfolio. ACRA notes a substantial improvement of risk management quality at both the Company level and VEB Group level; however, the adequacy of recently introduced risk practices remains to be assessed in a longer term.
Low capital adequacy ratios are the consequences of substantial provisions created in 2016-2017 covering the historic portion of lease portfolio, which resulted in a significant loss for the above period and required utilizing capital provided by the Russian Government through Vnesheconombank almost entirely (totaling RUB 154 bln).
As at January 1, 2018, capital adequacy ratio (CAR) stood at 7.4%, while the averaged capital generation ratio reflecting historical capacity to generate capital through retained earnings totaled a substantially negative value in 2013-2017. ACRA does not expect CAR to improve in the near future and notes that management has a goal to make the Company profitable in the medium term, while the state has no plans for any further injections to VEB-leasing’s capital.
Weak risk profile is based on a significant share of problem lease contracts: such assets exceeded 15% of the current lease portfolio of the Company as at January 1, 2018. ACRA classifies as problem debt the outstanding debt of leaseholders overdue for over 90 days, amounts of forced restructuring as well as debt with no overdue payments but high probability of servicing termination in the next 12 to 18 months. Under the current economic conditions ACRA expects the amount of problem debt to decline in 2018; however, any material adverse changes in the key Company’s business segments may affect the portfolio quality and drive increase in respective provisions.
However, ACRA notes low amount of contracts with overdue payments for 90 days or more: as at year-end 2017, NPL90+ totaled 0.4% of the current portfolio, while the aggregate amount of contracts with overdue payments (of at least one day) was 2.5% as at the above date.
ACRA notes high concentration of Company's funding on both key sources and specific creditors. In particular, Company’s securities were the largest funding source as at year-end 2017 (44.6%), while top five creditors accounted for around 60% of its liabilities. Vnesheconombank dominating among the largest creditors and holders of the Company’s bonds represents a factor mitigating the high funding concentration.
Company’s liquidity position is assessed as adequate. In ACRA’s base case scenario (based on the Company’s cash flow projections), the current liquidity indicator of VEB-leasing is around 1x-1.3x as at end of each quarter within the 12 to 24-month horizon. Emergency liquidity needs are moderate in stress scenarios of ACRA (the current liquidity ratio drops below 1x in some quarters). As the Company is a member of VEB Group and operates through a single treasury, it has access to emergency liquidity from VEB, which ACRA also regards as a positive factor in terms of liquidity management.
ACRA makes an upward one-notch adjustment to the Company’s SCA based on its competitive advantage that is not taken into account in SCA and is driven by additional available access to highly competitive and profitable segments of the leasing market owing to participation in Vnesheconombank’s projects related to transportation and manufacturing infrastructure development. Participation in the projects of VEB Group also involves Company’s engagement into implementing long-term government programs including respective subsidies and other preferences from the state.
- No changes to the business model within the 12 to 18-month horizon;
- The Company stays a member of VEB Group for a long time;
- CAR of at least 7% within the 12 to 18-month horizon;
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 negative rating action may be prompted by:
- A change in the shareholding structure, which may significantly lower the probability of extraordinary support and/or its quality.
Standalone creditworthiness assessment (SCA): b+.
Adjustments: +1 notch to SCA.
Support: The final rating equals the credit rating of VEB Group.
No outstanding issues have been rated.
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 Member Company Relationships Within Corporate Groups, and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities.
A credit rating has been assigned to JSC VEB-leasing for the first time. The credit rating and its outlook are expected to be revised within one year following the rating action (April 16, 2018).
The assigned credit rating is based on the data provided by JSC VEB-leasing, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using IFRS consolidated statements of JSC VEB-leasing and statements of VEB-leasing composed in compliance with RAS. The credit rating is solicited, and JSC VEB-leasing participated in its assignment.
No material discrepancies between the provided data and the data officially disclosed by JSC VEB-leasing in its financial statements have been discovered.
ACRA provided additional services to JSC VEB-leasing. No conflicts of interest were discovered in the course of credit rating assignment.