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Rating Action:

Moody's assigns (P)B1 rating to Russian Helicopters' proposed Eurobond

Global Credit Research - 26 Apr 2013

London, 26 April 2013 -- Moody's Investors Service has today assigned a provisional rating of (P)B1, with a loss given default (LGD) assessment of LGD5/89%, and a negative outlook to the proposed issuance of notes by Russian Helicopters Finance Limited, the sole purpose of which is to finance a loan to Russian Helicopters JSC (Ba2 negative). Russian Helicopters will use the proceeds from the notes placement to refinance part of its existing debt.

RATINGS RATIONALE

The (P)B1 rating assigned to the proposed notes is two notches below Russian Helicopters' corporate family rating (CFR), reflecting Moody's expectation that the notes (1) will be issued for the sole purpose of financing a loan to Russian Helicopters (which is a holding company of the group), and therefore the noteholders will rely solely on the latter's creditworthiness to service and repay the debt; and (2) will be structurally subordinated to debt located at the level of operating companies of Russian Helicopters group, which represents a dominant portion of the group's total debt (including state-guaranteed loans).

As Russian Helicopters is fully owned by the state-controlled Corporation Oboronprom, Moody's applies its rating methodology for government-related issuers (GRIs) in determining the company's CFR. According to this methodology, the rating is driven by a combination of (1) Russian Helicopters' BCA of b2; (2) the Baa1 local currency rating of the Russian government; (3) the very high default dependence between the company and the government; and (4) the strong probability of state support in the event of financial distress.

The b2 BCA is weakly positioned and factors in (1) Russian Helicopters' weak liquidity, with internal sources being insufficient to cover the company's significant working capital needs and debt repayments (as of year-end 2012), leading to strong reliance on continuing external funding; (2) significant customer concentration, with nearly a half of the company's 2012 revenues derived from state orders, which, however, provides for some revenue stability; (3) a weaker global service network and aftermarket business segment compared with that of competitors; (4) uncertainty related to potential changes in the shareholder structure, as the company may conduct an IPO over the next few years; and (5) the company's overall exposure to an emerging market operating environment with a less developed regulatory, political and legal framework.

At the same time, the BCA reflects Russian Helicopters' (1) leading competitive position in its core Russian market and strong positions in India and China, based on the company's offerings in the medium-lift segment (Mi-8/17) and attack segment (Mi-24/35, Mi-28, Ka-52); (2) wide product range and solid order book, based on long-term contracts with the Russian Ministry of Defence along with commercial and military export orders; and (3) potential for growth due to the development of new and upgraded helicopter models on the back of increasing global demand.

The negative outlook on Russian Helicopters' CFR reflects the company's weak credit metrics for its current CFR and baseline credit assessment (BCA). The outlook also reflects the uncertainty over the company's ability to demonstrate a clear and sustainable improvement trend with regard to its financial metrics over the next 12 months, and leverage in particular, with debt/EBITDA trending below 8.0x (calculated including state-guaranteed loans) and 4.0x (excluding state-guaranteed loans).

WHAT COULD CHANGE THE RATING UP/DOWN

Moody's does not envisage any positive pressure being exerted on Russian Helicopters' ratings over the next 12-18 months. However, the rating agency could raise Russian Helicopters' BCA by one notch if the company's debt/EBITDA declines below 6.0x (calculated including state-guaranteed loans) and 2.5x (excluding state-guaranteed loans) on a sustainable basis, while at the same time the company improves its liquidity profile.

Moody's could downgrade the ratings if Russian Helicopters fails to demonstrate a clear improvement trend with regard to its leverage over the next 12 months, with debt/EBITDA trending below 8.0x (calculated including state-guaranteed loans) and 4.0x (excluding state-guaranteed loans). In addition, negative pressure could be exerted on the ratings in the event of a material deterioration in the company's liquidity. A one-notch downgrade of the sovereign rating would not in itself trigger a downgrade of Russian Helicopters' rating, provided that all the other GRI inputs remain unchanged.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was the Global Aerospace and Defense published in June 2010. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009, and the Government-Related Issuers: Methodology Update published in July 2010. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Russian Helicopters JSC is the sole Russian designer and manufacturer of helicopters and one of the few companies worldwide with the capability to design, manufacture, service and test modern civilian and military helicopters. Russian Helicopters is a vertically integrated holding company comprising five helicopter assembly plants, two design bureaus, two components production plants, one overhaul plant and one helicopter service company providing aftermarket services in Russia and abroad. In 2012, Russian Helicopters generated revenues of RUR126 billion ($4 billion).

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Artem Frolov
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service Limited, Russian Branch
7th floor, Four Winds Plaza
21 1st Tverskaya-Yamskaya St.
Moscow 125047
Russia
Telephone: +7 495 228 6060
Facsimile: +7 495 228 6091

David Staples
MD - Corporate Finance
Corporate Finance Group
Telephone: 00971 4237 9536

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Moody's assigns (P)B1 rating to Russian Helicopters' proposed Eurobond
No Related Data.

 

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