Fitch Ratings-London/Moscow-22 December 2017: Fitch Ratings has affirmed JSC Sukhoi Civil Aircraft's (SCAC) Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'BB-'. The Outlook is Positive. Fitch has also affirmed SCAC's senior unsecured rating at 'BB-' and Short-Term Foreign- and Local-Currency IDRs at 'B'. Fitch has simultaneously withdrawn the ratings. The withdrawal of the ratings is due to commercial reasons. Fitch will no longer provide ratings or analytical coverage of the company.
KEY RATING DRIVERS
State Support: In line with Fitch's parent subsidiary linkage methodology, SCAC's ratings are notched down three levels from the ratings of its ultimate majority shareholder, the Russian sovereign (BBB-/Positive). The three-notch differential reflects the company's strong links to the state supported by the continued equity injections. However, the state does not guarantee SCAC's debt. Due to the company's importance to the government, Fitch expects SCAC to continue to receive support from the Russian state over and above what has already been contributed. Any actual or perceived waning of that support is likely to lead to SCAC's ratings being further notched down from those of the sovereign.
Limited FX Risks: SCAC's costs and revenues are not entirely matched in terms of currencies, as the majority (around 95%) of revenues are in USD, while only 70% of costs are in foreign currency. Therefore, SCAC benefits from the weakening rouble and given our conservative forecasts for the rouble, the company is likely to continue to benefit from it. However, should the rouble strengthen, it would negatively affect the company's financial performance. The company does not hedge its foreign currency exposure.
Delivery Ramp-up: SCAC has regularly struggled to deliver on management's forecasts regarding the ramp-up of the SSJ100. Due to adverse economic conditions in the company's core market (Russia), as well as weak penetration of the export markets, SCAC only delivered 26 aircraft in 2016 (up from 25 in 2015). Fitch expects deliveries between 2017 and 2020 to range between 27 and 30. However, as the firm backlog is under 100 units, production could be adjusted down in the short term if no new orders are won. SCAC has made efforts to diversify away from Russian-based customers, but the domestic market remains its core source of revenue, with 47% of the company's expected aircraft deliveries for Russian companies.
Debt to Equity Conversion: In December 2016 SCAC converted its shareholder's debt (over RUB100 billion) into equity. Furthermore, Sukhoi Aviation Holdings bought out the minority shareholder, Alenia Aeronautica (a subsidiary of Finmeccanica (BB+/Positive)), and now controls 100% of SCAC. Fitch views this as a sign of tangible support, which supports the ratings.
SCAC's ratings are currently based on Fitch's Parent and Subsidiary Linkage Criteria and are notched down by three notches from the rating of the ultimate parent - the Russian Federation - due to the support the company receives from the state in the form of equity injections and loans from state banks, which demonstrate the importance of the company to the state. The majority of other Fitch-rated Russian and CIS-based companies whose ratings incorporate state-support and are notched down from the sovereign rating, such as KazMunayGas (BBB-/Stable) or Samruk Energy (BB+/Stable), have ratings that are closer to those of the parent as they are in sectors that are perceived as being more strategically important to the parent, such as natural resources or utilities.
We view SCAC's standalone rating profile as very weak at present, characterised by the company's small size, weak market position and weak financial metrics. In some respects, its standalone profile is similar to JSC National Company Kazakhstan Engineering (BB+/Stable), which is also heavily reliant on the sovereign's support and notched down by two notches from the state rating. Nevertheless, Fitch believes that SCAC is likely to improve its financials in the coming years as it continues to increase its ramp-up and penetration of both domestic and foreign markets.
Fitch's Key Assumptions Within Our Rating Case for the Issuer
-Aircraft deliveries gradually increase to 30 by 2020
-Costs gradually decreasing to sustainable levels over 2017-2020
-Capex at around USD50 million over the forecast period
-No equity injections from the state
Liquidity Reliant on Russian Government: SCAC continues to be reliant on financing from the Russian government and state-owned banks, as Fitch expects the company to be FCF negative in 2017. As of 1H17, around 60% of the company's debt was from state-owned banks (Sberbank and VTB). In addition, SCAC has remaining shareholders debt of around USD55 million (8% of the total debt) from JSC United Aircraft Corporation (UAC) and Sukhoi Aviation Holding. Fitch expects this level of support to continue to underpin the company's liquidity, alongside SCAC's gradual production and sales progress, which should lead to positive FCF in the medium to long term. The company's cash position of USD54 million, combined with the unused credit facilities from the major Russian banks of USD390 million should be sufficient to cover the company's short-term needs.