London, 26 November 2018 -- Moody's Investors Service has today changed to negative from stable the
outlook on the ratings of KAMAZ PTC (Kamaz), a government-related,
leading Russian heavy truck manufacturer.
At the same time, Moody's has affirmed Kamaz's Ba3 corporate
family rating (CFR) and Ba3-PD probability of default rating (PDR).
Moody's has also affirmed Kamaz's b3 baseline credit assessment
(BCA), with the BCA reflecting the company's standalone credit
strength.
The change of the outlook on Kamaz's ratings to negative was prompted
by Kamaz's performance, which for 2018 was much weaker than
Moody's had expected, and the substantial deterioration in
its margins and financial profile this year, with limited prospects
of a recovery over the next 12-18 months. Such a situation
will increase the company's vulnerability to market pressures and
its dependence on government support.
Nevertheless, the affirmation of Kamaz's ratings and BCA recognizes
the strong support to the company from the Russian government (Ba1 positive),
on a day-to-day and extraordinary basis, as well as
Kamaz's comfortable debt structure and maturity profile.
RATINGS RATIONALE
Kamaz's ratings are weakly positioned in the Ba3 rating category,
as reflected by the negative outlook on the ratings, given a significant
deterioration of the company's financial profile in 2018.
Kamaz's operating performance in 2018 has been unexpectedly weaker
when compared to its own plans and Moody's expectations.
The weakness is due to one-off events — such as overstocking
in the first half of this year, as a result of the delays in the
Euro-5-compatible engine certification process — and
higher-than-expected pressures from the market and operating
environment, including the stronger competition from foreign truck
manufacturers, coupled with rouble volatility.
In the first half of 2018, the company's EBITA margins weakened
to 3.0% compared to 6.3% in the similar period
of 2017, while its operating cash flow turned negative, and
its leverage — as measured by debt/EBITDA — jumped to 7.1x
by mid-2018 versus 4.4x at the end of 2017. Moody's
foresees a further rise in leverage by the end of 2018, given the
continued weakness in margins and EBITDA in the second half of 2018.
Moody's expects that Kamaz's operating cash flow will turn
positive in 2019. However, the company's financial
profile will remain weak over the next 12-18 months, given
increasing pressure on margins, the slowdown of growth in the domestic
heavy truck market (which might slow down the destocking thereby putting
pressure on working capital), and the ongoing heavy investment programme.
Kamaz's capital expenditure program is significant (RUB20 billion
through 2020), constraining its ability to reduce leverage.
Moody's assesses that Kamaz's margins will continue to face
downward pressure. Consequently, Moody's expects that
Kamaz will show only a limited recovery in its financial profile by 2020,
supported by its solid market share, a better price-quality
offerings, and ongoing efforts to tightly manage its costs.
With this background, Moody's notes that Kamaz's weak
financial profile and operational challenges leave the company very limited
headroom for further underperformance, without challenging its current
BCA and Ba3 ratings.
The affirmation of Kamaz's ratings despite a significant deterioration
in its financial profile considers the strong day-to-day
support to the company from the Russian government, ranging from
measures to back demand to investment and liquidity funding, and
Moody's expectation that such support will continue, given
Kamaz's strategic importance to the domestic economy and the government's
focus on the economy's diversification beyond commodity-related
sectors.
The affirmation also factors in Moody's assumption of a strong probability
that Kamaz will receive support from the Russian government in the event
of financial distress. The assumption of government support continues
to add a significant uplift to Kamaz's b3 BCA, driving its
rating to the Ba3 category under Moody's Government-related
issuers (GRI) methodology.
Moody's positively notes the company's comfortable debt structure
and overall long-term debt maturity profile. At 30 September
2018, Kamaz's long-term debt obligations — the
majority of which are due after 2021 — accounted for 80%
of total debt. Around 40% (RUB35 billion) of Kamaz's
debt was represented by the company's domestic bonds as of 30 September
2018, and was guaranteed by the government. Overall,
government-guaranteed and/or government-related debt (including
loans issued by government-controlled banks) accounted for around
70% of Kamaz's total debt.
Moody's sees Kamaz's liquidity as adequate at the end of September
2018, given that its cash sources cover its cash needs over the
next 18 months. However, against the backdrop of its sizable
capital expenditure program — which is comfortably funded by state-related
or state-guaranteed debt sources — Kamaz will become more
reliant on its revolving credit facilities to fund its operating needs,
due to weak cash flow generation capacity. Consequently,
the company's headroom under its covenants will tighten to an extent
that Kamaz will need to renegotiate some of them. At the same time,
Kamaz holds large cash reserves of around RUB20 billion — which
are largely intended for capital expenditure purposes — and has
sizable availabilities under long-term revolving facilities and
access to long-term shareholder loans.
RATIONALE FOR THE NEGATIVE OUTLOOK
The negative outlook on Kamaz's ratings reflects Moody's expectation
that the company's weak margins and high leverage will unlikely
materially recover over the next 12-18 months. Such a profile
makes Kamaz very vulnerable to market pressures and any unexpected developments,
and increases the likelihood of further weakening of the company's
standalone credit quality — given that Kamaz is in the middle of
a heavy investment cycle and considering the slowdown of growth in the
domestic heavy truck market.
WHAT COULD CHANGE THE RATING UP/DOWN
Given the negative ratings outlook, Kamaz's ratings will unlikely
face upward pressure in the short term.
Moody's could change the ratings outlook to stable if: (1)
Kamaz demonstrates sustainable and material recovery in its margins and
financial metrics towards levels seen in 2017, supported by increasing
EBITDA; and (2) liquidity remains at least adequate. The stable
outlook would assume no negative change in Russia's sovereign rating and/or
in Moody's assumption of strong government support for Kamaz in times
of need.
Moody's could downgrade Kamaz's ratings if: (1) the company's
key market or its competitiveness were to deteriorate, and/or its
margins, financial and/or liquidity profile were to weaken,
challenging its debt service capacity; (2) there is a decline in
the probability of government extraordinary support to Kamaz in the event
of financial distress; or (3) Moody's downgrades Russia's sovereign
rating.
PRINCIPAL METHODOLOGY
The methodologies used in these ratings were Global Manufacturing Companies
published in June 2017, and Government-Related Issuers published
in June 2018. Please see the Rating Methodologies page on www.moodys.com
for a copy of these methodologies.
KAMAZ PTC (Kamaz) is a leading player in the Russian heavy truck market.
Russia's 100% state-owned investment holding company,
State Corporation Rosstechnologii, holds a 47.1% stake
in Kamaz. In the 12 months to 30 June 2018, Kamaz generated
revenue of RUB175.2 billion ($3.0 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 credit rating action on the support provider and in relation to
each particular credit 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 credit rating action,
and whose ratings may change as a result of this credit 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.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
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.
Ekaterina Botvinova
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Limited, Russian Branch
7th floor, Four Winds Plaza
21 1st Tverskaya-Yamskaya St.
Moscow 125047
Russia
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Victoria Maisuradze
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
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