Fitch Affirms STLC & Rosagroleasing at 'BB'; Revises STLC's Outlook to Positive

Fitch Ratings-London-19 December 2017: Fitch Ratings has affirmed the Long-Term Issuer-Default Ratings (IDRs) of PJSC State Transport Leasing Company (STLC) and JSC Rosagroleasing (RAL) at 'BB'. The Outlook on STLC's ratings has been revised to Positive from Stable. The Outlook on RAL is Stable. A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS
IDRS, SUPPORT RATINGS, SUPPORT RATING FLOORS
The companies' ratings are driven by the moderate probability of support from the Russian sovereign (BBB-/Positive). In assessing support, Fitch views positively: (i) both companies' 100% state ownership; (ii) the track record of past equity injections (more recently, at STLC); (iii) the low cost of potential support given the companies' small size and low leverage (especially at RAL); and (iv) the companies' policy roles (albeit somewhat limited) in the execution of state programmes to support the transportation (STLC) and agricultural (RAL) sectors.

At the same time, the two-notch difference between the companies' Long-Term IDRs and those of the Russian sovereign reflects STLC's and RAL's lower systemic importance and policy roles compared with large state banks, specifically Vnesheconombank (BBB-) and Russian Agricultural Bank (BB+). For RAL, it also factors in potentially weaker support propensity given the company's weak performance and previous corporate governance failings leading to large credit losses, as well as potential further problems, which may require extra provisioning.

The revision of the Outlooks on STLC's Long-Term IDRs reflects Fitch's expectation of a strengthening of the government's ability to provide support, as reflected in the Positive Outlook on the sovereign ratings.

The Stable Outlook on RAL reflects the limited potential for an upgrade, even in case of an upgrade of the sovereign rating, given its limited policy role.

STLC'S IDRS AND SENIOR DEBT
STLC is one of the largest Russian leasing companies by total outstanding lease portfolio and volume of new business. It has been under the direct oversight of the Ministry of Transport since 2009. STLC's participation in state programmes for the development of the Russian transportation industry was extended to several new areas in 2016.

Existing programmes (the major one is providing lease financing for the Russian-built Sukhoi Superjet 100 aircraft) continue to be implemented, and STLC anticipates receiving further equity injections of up to RUB49 billion by end-2018 to support these (including RUB25 billion related to Sukhoi Superjet).

Fitch views STLC's intrinsic creditworthiness as modest given the company's asset quality deficiencies, large balance sheet concentrations, considerable exposure to residual value risk, limited liquidity of the company's assets and only break-even profitability to date. However, the standalone credit profile is underpinned by a comfortable capital position and a track record of market access.

STLC's lease book is concentrated, which is typical for Russian state-owned leasing companies. At end-1H17, the largest exposure (22% of total earning assets) was represented by operating lease contracts with a Russian airline, and the second-largest exposure (12% of earning assets at end-1H17, but may slightly increase to 14% by end-2017) is relatively new and was represented by finance lease contracts for innovative rail wagons. Neither of these exposures provide for upfront payments, and thus bear high residual value risk.

Problem exposures (net investments in lease and other receivables on terminated contracts overdue by 90+ days plus foreclosed assets) have been stable since the last review in May 2017 and were a moderate 5% of total earning assets at end-1H17.

STLC's financial leverage (debt/equity) has been comfortable at around 3x since end-2015, helped by several equity injections in 2015-2017. Management expects annual growth of around 20%-30% in 2017-2020, which could increase leverage to a still reasonable 4x, given the planned equity injections to support this.

During 2018, STLC has RUB35 billion of maturing debt principal (including RUB4 billion of put options on local bonds), which equalled 15% of total liabilities at end-3Q17, and will also need to pay RUB16 billion of interest. In addition to servicing and refinancing outstanding debt, STLC would need to attract at least RUB40 billion of new funding to maintain anticipated annual growth of 20%, Fitch estimates. STLC's available liquidity buffer at end-3Q17 was a moderate RUB18 billion, although proceeds from outstanding lease contracts of RUB40 billion in 2018 (net of VAT) could also be used to repay funding, if needed. Fitch views STLC's plans to refinance maturing facilities and raise new funding as feasible due to the company's track record in market access and close ties with Russian state banks.

STLC's rouble-denominated senior unsecured debt ratings are aligned with the company's Long-Term Local-Currency IDR. The US dollar-denominated notes issued by its Ireland-based subsidiary GTLK Europe DAC are rated in line with STLC's Foreign-Currency IDR as they benefit from an unconditional and irrevocable guarantee from STLC.

RAL'S IDRS
RAL focuses on subsidised directed leases to customers from the agricultural sector. Leases under the government sector support programme dominate the portfolio (98% of net investments in lease (NIL) before reserves at end-2016, the date of the latest IFRS accounts), and are generally funded by state capital injections. This book has been stable in recent years, as the company is using proceeds from lease repayments for issuance of new leases, while the commercial book (and hence lending from third parties) has been gradually amortising (now accounting for just 2% of NIL) and RAL does not intend to increase it.

RAL operates in a segment with high operational and market risks. Governance failings under previous management prior to 2010 also weigh on asset quality metrics (76% of credit reserves have been made against legacy leases). The company does not write off problem assets and their share was a high 31% of end-2016 NIL; reserves were equal to 13% of NIL. In addition, RUB36 billion of other assets were problematic (these include trade and other receivables, largely for livestock and advances paid) but these were sufficiently reserved (82%). Total unreserved problematic assets amounted to RUB15 billion or 28% of RAL's Fitch Core Capital.

Given the company's low leverage (debt-to equity ratio of 10% at end-2016), it has the capacity to comfortably reserve problem assets. However, the newly issued leases may be a source of additional risks.

RAL expects no capital contributions in 2018 and has no growth plans as the company will rely on reinvesting proceeds from the existing lease portfolio. RAL is included in the state programme of agricultural development for 2013-2020, but the absolute volume of its operations and participation is limited, and any expansion of new originations will depend on capital injections.

RAL's borrowings (RUB5.1 billion at end-2016, all loans from banks) were equal to a small 8% of total assets, meaning only limited refinancing and liquidity risk. Russian state-owned banks accounted for 98% of this funding. RAL's borrowings are all secured, mainly by the company's deposits in banks, but also by lease receivables.

RATING SENSITIVITIES
STLC's Long-Term IDRs could be upgraded if Russia's sovereign ratings are upgraded. The ratings could be affirmed if the Outlook on Russia's ratings was revised to Stable.

In addition, more significant policy roles for STLC and RAL with respect to implementation of state programmes to support the Russian transportation and agricultural sectors, underpinned by sufficient capital provided by the authorities, could be positive for the ratings.

Conversely, a diminishing of the companies' policy roles or a sharp increase in leverage as a result of attraction of market funding could result in a downgrade.

The rating actions are as follows:

PJSC State Transport Leasing Company
Long-Term Foreign- and Local-Currency IDRs: affirmed at 'BB', Outlooks revised to Positive from Stable
Short-Term Foreign-Currency IDR: affirmed at 'B'
Support Rating: affirmed at '3'
Support Rating Floor: affirmed at 'BB'
Senior unsecured debt rating: affirmed at 'BB'

GTLK Europe DAC
Guaranteed notes long-term rating: affirmed at 'BB'

JSC Rosagroleasing
Long-Term Foreign-Currency IDR: affirmed at 'BB'; Outlook Stable
Short-Term Foreign-Currency IDR: affirmed at 'B'
Support Rating: affirmed at '3'
Support Rating Floor: affirmed at 'BB'