CJSC AK&M Rating Agency upgraded the credit rating of OJSC SOLLERS to ‘A' from ‘B++' with a stable outlook as per the national scale.
The ‘A' rating qualifies the Company as a highly reliable borrower. Risk of a delay in meeting liabilities is relatively low, restructuring risk for the loan / part of the loan is minimal.
SOLLERS is one of leading automobile manufacturers in Russia. It owns controlling stakes in several enterprises of the automotive industry, unites UAZ (Ulyanovsk Automobile Plant), ZMZ (Zawolzhsky Motorny Zawod), SOLLERS Far East and other production assets. The enterprises of SOLLERS Group (hereinafter referred to as the Group) produce domestic UAZ off-road light and commercial vehicles, SsangYongs automobiles (South Korea), ISUZU lorries as well as gasoline and diesel engines ZMZ. In September 2011, the SOLLERS Group's production facilities in the Special Economic Zone ALABUGA and Naberezhnye Chelny were contributed to the joint venture Ford Sollers which will undertake production of Ford automobiles. Ford Motor Company and SOLLERS signed the agreement to set up the JV Ford Sollers (to be owned on a parity basis) was signed 6/8/2011. The project assumes building up large-scale production of light and commercial vehicles and off-road cars with the annual capacity of 350 thousand automobiles, the assembly localization target being at least 60% including production of power units in Russia. To implement the project, the joint venture obtained long-term (10 years) project financing in the amount of RUB 36 billion with Vnesheconombank. On October 1, 2011, the joint venture started its operating activities. Also, SOLLERS is managing a dealership chain and benefits from its own leasing unit.
A major argument for the rating upgrade is the high potential and the positive trend in the Issuing Company's development. The Company's production assets enable it to manufacture a wide range of both domestic and foreign automobiles. Both the production capacities and the automobile brand portfolio are expanding. After a heavy performance drop in 2009, both sales result and incomes of the group improved in the first half year 2011. For 10 months 2011, the company sold 97.3 thousand automobiles exceeding the sales result over 10 months 2010 by 35%. The automobile engine sales result also visibly improved. Consolidated revenue of the Group as of 11/30/2011 was RUB 64.32 billion, far above the revenue secured for 11 months 2010. As the domestic economy revives after the crisis years, the upward trend in the production output and incomes of the Group is likely to continue.
The Company's growing market weight also supports the credit rating score. Today, SOLLERS Group's sales performance is surpassing the average level in the industry, which indicates the growing competitive edge.
The fairly high product diversification adds the Company's market stability. SOLLERS Group's vehicle line is well-diversified, especially on the background of the domestic competitors. The Company produces automobiles of various classes and in various price segments. Apart from the core models, SOLLERS Group produces ambulance cars, reanimobiles, school buses, fixed-route taxis and social cars. Besides, its subsidiary company ZMZ (Zawolzhsky Motorny Zawod) is the largest Russian manufacturer of four- and eight-cylinder engines for off-road cars, buses, light trucks and special purpose automobiles.
Today, the Group shows favorable performance in the way of profit. In 2010, the Group's incomes rose against 2009, and the profit continued to grow in 2011. Operating profit for 2010 was RUB 2.27 billion against a loss of RUB 1.57 billion for 2009, EBITDA totaled RUB 4.55 billion against RUB 0.26 billion for 2009. For the first half year 2011, the Group's profit totaled RUB 0.9 billion against a net loss of RUB 1.24 billion for 2010. Overall, the company's performance trends are favorable in 2011, the profit advance being particularly appreciable.
At the same time, the rating score is restricted by the high debt burden, although the amount of liabilities decreased considerably by early fourth quarter 2011 from what it had been in the preceding periods. In 2010, according to the Group's consolidated statements, its debt (short-term and long-term credits and loans) decreased by 9% year-on-year reaching RUB 24.5 billion as of December 31, 2010. The debt reduction trend continued in 2011. As of December 31, 2011, the Group's consolidated debt totaled RUB 16.649 billion which is favorable for the Issuing Company when estimating its reliability. Another negative point is that the debt still exceeds the Company's own funds. Debt to asset ratio in the first half year 2011 was 49%, debt to equity ratio reached 267.4%. At the same time, the company essentially improved its debt profile. Over 2009, short-term liabilities decreased by 34.9 percentage points against the start of the year reaching 30.5% as of December 31, 2010. In 2011, the share of short-term liabilities increased to 45.0% as of June 30, 2011.
The high dependence on the macroeconomic situation also sends negative signals for the rating score. The Company's business success directly depends on the income level of Russia's population. Any deterioration of the macroeconomic situation cuts expenses of legal entities and individual customers which affects demand for automobiles. This would cause a drop in production and incomes of the Company. Besides, SOLLERS depends on the Government's measures taken to protect domestic automobile manufacturers, and exchange rate fluctuations influencing the Company's expenses.
The principal sovereign risks for the Company are political and economic risks. These risks are brought about by Russia's economic reforms and the development of the legal, tax and administrative environment in the Russian Federation. Also, economic risks depend on the sustainability of the Russian economy which in many respects hinges on the progress of these reforms and the anti-recessionary measures taken in pursuance of the financial and monetary policy. It will be noted that there is a risk of shrinking sales in the LCV segment (including trucks) after Russia's accession to the World Trade Organization as the customs duties fall from 25% to 15% in the LCV segment and further to 10% within three years. At the same time, the customs duties on passenger cars are not expected to fall drastically.
This press release is based on the statement of assigning credit quality ratings to OJSC SOLLERS, its bond issues 02 and BO-2.
The rating score, along with any information and conclusions provided in this press release, only conveys our opinion on the company's reliability and shall not be considered as advice on the purchase and sale of securities or the provision of loan facilities.
AK&M Rating Agency will not incur any responsibility for any interpretations, inferences and consequences related to the application of results of the rating estimation procedure by any third parties.
AK&M Rating Agency is a leading independent national rating agency engaged in rating activities since 1993.
AK&M Rating Agency is accredited by the Ministry of Finance of the Russian Federation (order no. 452 as of September 17, 2010).
AK&M Ratings are recognized by the Central Bank of Russia (for providing unsecured lending facilities – Provision 323-P), Vnesheconombank (for granting subordinated loans) and SME Bank (for its program of lending to SME businesses), RUSNANO (when selecting banks to provide business banking services to project and engineering entities implementing investment projects), the MICEX (as a prerequisite for including bonds in the Corporate Bond Index / MICEX CBI and Municipal Bond Index / MICEX MBI calculation base, for listing bonds and for providing access to the MICEX+ trading mode). Pursuant to an order of Russia's Government AK&M Ratings count for approving the capitalization increase procedure for banks. Besides, AK&M Rating Agency is recognized by AHML and accredited by SRO National Securities Market Association.
CJSC Analysis, Consulting and Marketing Rating Agency
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Press release by: A.V. Yakovenko
Phone no. (495) 916-70-30, fax no.: (499) 132-69-18.