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Rating Action:

Moody's assigns Ba1 rating to OJSC Power Machines; stable outlook

25 Jul 2013

London, 25 July 2013 -- Moody's Investors Service has today assigned a Ba1 corporate family rating (CFR) and a Ba1-PD probability of default rating (PDR) to OJSC Power Machines (PM), a Russian producer of power equipment. The outlook on the rating is stable.

" The ratings reflect the company's consistent track record of robust operational and financial performance and our expectations that it will continue to demonstrate strong financial metrics" - says Sergei Grishunin, a Moody's Assistant Vice President - Analyst and lead analyst for PM. "At the same time we view PM's modest size and limited diversification as a constraint on the rating, as is the company's sales concentration in the Russian market, its concentrated ownership structure and undeveloped corporate governance".

RATING RATIONALE

Today's rating assignment reflects 1) PM's consistent track record of strong operational and financial performance with high profitability (three-year average adjusted EBITA margin of over 20%), which exceeds that of the power equipment divisions of its global peers; 2) low leverage (three-year average adjusted debt/EBITDA of around 0.4x); 3) high cash flow generation (three-year average retained cash flow (RCF)/debt at above 100%); and 4) strong liquidity position. The rating also reflects Moody's expectation that the company will continue to demonstrate strong financial metrics over time, in line with its conservative financial policy of maintaining reported debt/EBITDA below 2.0 times.

This robust performance is underpinned by 1) the strong fundamentals of PM's core Russian electric power equipment market, in which steady growth has been underpinned by ongoing modernisation (in accordance with Russian state programmes, which aim is to increase electricity generation and rehabilitate the ageing domestic electric power equipment fleet) performed by domestic (mainly state controlled) electric utilities companies. However, Moody's notes that the regulatory and market framework is evolving.

The company's performance is further supported by 1) PM's dominant market position in the domestic electric power equipment market (with the share of installed power equipment fleet of around 60%), which, coupled with the company's ability to provide an integrated solution for power stations of all types and established long-term relationships with domestic electric utilities companies, erects high barriers to entry and allows PM to command premium prices and advantageous contract terms; 2) the historically higher profitability of manufacturing traditional electric power generation equipment than other electric equipment (such as power grid equipment or wind and solar electric generation equipment); 3) lower labour and energy cost in Russia; 4) the company's low capex requirements in the next 12-24 months and 5) the company's focus on efficiency improvements and cost optimisation.

PM's ratings also reflect 1) its strong order backlog of more than 24 months of sales, which provides high visibility of future revenues; and 2) PM's low operating leverage (with company's cost structure with around 60% of variable costs), which reduces the volatility of profits and increases the company's ability to compete on prices.

At the same time, the ratings factor in PM's modest size compared with those in its global peer group including Siemens Aktiengesellschaft (Aa3 negative) or Alstom (Baa3 stable). This may constrain PM's ability to negotiate favourable contract terms, to participate in certain tenders in particular outside of Russia and perform sufficient R&D and equipment modernisation.

PM's ratings also reflect its concentration of sales (around 80%) in the Russian market. This concentration may expose PM to the longer term challenges of the domestic electric power equipment market such as potential reduction of capex programmes of domestic utilities companies or increase in competition due to entry or expansion of larger foreign competitors. This exposure is partly mitigated by the company's efforts to increase revenue diversification to export markets with strong fundamentals (such as India, Latin America and Asia), in which PM has established business relationships. Moody's also notes that unlike global peers which are diversified across multiple businesses, PM's operations are concentrated on manufacturing of electric power generation equipment thus exposing the company to industry shifts driven by introduction of new products, overcapacity of electric utilities resulting in decrease in capex or increase in competition. However, the cyclicality in this industry in comparison to other heavy manufacturing industries (e.g. truck manufacturing) is lower. The ratings are also constrained by risks associated with the PM's concentrated ownership structure and developing corporate governance system.

OUTLOOK

The stable outlook on PM's rating reflects our expectations that the robust business conditions will remain for PM's key markets. The outlook also assumes that the company will continue to follow its strategy of organic growth whilst maintaining a high profitability and a strong financial profile within a stated financial policy.

WHAT COULD CHANGE THE RATING UP/DOWN

Moody's does not envisage positive pressure being exerted on PM's rating in the following 12-18 months. Nevertheless, Moody's would consider upgrading the rating if (1) conditions in PM's key markets remain robust; (2) PM upgrades its corporate governance so that the company's financial policies and strategy are to a lesser degree dependent on the decisions of the controlling shareholder; and (3) PM were to increase its revenue generation and expand geographical diversification of its revenue outside Russia and/or product diversification, while continuing to demonstrate on a sustainable basis (i) strong profitability; and (ii) conservative financial metrics within its stated financial policy. Additionally, in light of negative working capital nature of the power equipment manufacturing industry, a rating upgrade would require PM to demonstrate its ability to maintain an appropriate level of liquidity in the form of cash balances, and strong liquidity management.

Downward pressure on the ratings would be likely to develop if 1) weaker-than-anticipated conditions in PM's key markets were to result in deterioration in the size and quality of the company's order book, and in PM's leverage (measured as adjusted debt/EBITDA) increasing to, and remaining, above 2.0 times; or 2) material debt-financed expansion projects and/or acquisitions, or debt-financed dividend payouts to shareholders or other shareholder initiatives, were to lead to the company materially deviating from its stated financial policies or above-mentioned financial thresholds.

PRINCIPAL METHODOLOGY

The principal methodology used in this rating was the Global Heavy Manufacturing Rating Methodology published in November 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Headquartered in St. Petersburg, Russia, OJSC Power Machines is manufacturer of a wide range of electric power generating equipment (turbines, generators, boilers and other equipment) and integrated solutions for electric power plants of all types and sizes. 100% of PM's share capital is indirectly controlled by Mr Aleksey A Mordashov. In 2012, PM generated revenue and adjusted EBIT of $2.0 billion and $0.5 billion, respectively.

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.

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.

Sergei Grishunin
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 Ba1 rating to OJSC Power Machines; stable outlook
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