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Rating Action:

Moody's assigns first-time Ba1 rating to OJSC KAMAZ; outlook stable

25 Sep 2013

London, 25 September 2013 -- Moody's Investors Service, ("Moody's") has today assigned a Ba1 corporate family rating (CFR) and a Ba1-PD probability of default rating to OJSC Kamaz (KAMAZ). The outlook on the ratings is stable. This is the first time Moody's has assigned a rating to KAMAZ.

RATINGS RATIONALE

As KAMAZ is 49.9% owned by the Russian state-owned corporation "Rosstechnologii" (RosTec) Moody's has applied its rating methodology for government-related issuers (GRIs) in determining the company's CFR. According to this methodology, KAMAZ's rating is driven by a combination of the following inputs:

- KAMAZ's baseline credit assessment (BCA) of b1

- The Baa1 local currency rating of the Russian government

- Moody's assessment of high default dependence between the company and the government

-- Moody's assessment of a strong probability of state support in the event of financial distress.

Moody's assesses the default dependence between the Russian government and KAMAZ as high given that (1) in the past four years KAMAZ has derived around 13% of its annual revenues (on average) from domestic sales to the Russian government agencies; and (2) the company derives more than 80% of its revenues domestically.

The rating agency assesses a strong probability of support for KAMAZ from the government due to the history of state support, including granting loans at reduced rates and providing explicit guarantees to KAMAZ's debt, subsidising the company's research and development (R&D) expenses, granting KAMAZ a reduced property tax rate, and the partial reimbursement of interest expenses under certain types of loans as well as our expectation that going forward the government is likely to continue to support KAMAZ in case necessary. Strong probability of support also reflects (1) KAMAZ's importance to state security as it supplies security and defense products in government contracts; (2) the importance of the automotive industry in underpinning national economic growth outside oil -- or other commodity-related sectors. In addition, the Russian government, through RosTec exercises significant influence over KAMAZ's strategy and holds four seats (out of 11) in KAMAZ's Board of Directors.

KAMAZ's BCA is constrained by its limited product diversification as trucks and spare parts represent around 80% of revenue in 2012, thus exposing the company to the cyclical nature of the truck market illustrated by an history of high leverage (measured by adjusted debt/EBITDA) which peaked at around 20x at year-end 2009, albeit reduced to 1.8x at year-end 2012 on the back of growing profitability and reduced debt. It also reflects KAMAZ's (1) geographical concentration of sales in Russia which exposes KAMAZ to weaknesses and volatility of this particular market ; (2) limited track record of operations under the recently adopted moderately conservative financial policy with net debt/EBITDA of below 2.5x, net debt/capital of below 40%, and EBITDA/interest expenses of above 5.0x; (3) by KAMAZ's sizeable capital expenditure programme of around $1 billion in 2013-15, suggesting negative free cash flow (FCF) generation in the next 12-18 months. and (4) modest size in comparison to its global peers such as Daimler AG (A3, stable) or MAN SE (A3, positive) which may constrain KAMAZ's ability to diversify globally and compete with larger global peers or to perform sufficient R&D. Moody's also sees execution risks to the company's plans aimed to increase revenue and profitability in the next 12-24 months due to slow GDP growth in Russia of around 2.5%-3.5% (2012: 3.4% ) which is lower than that expected by KAMAZ.

More positively the BCA factors in KAMAZ's strong position in the Russian trucks market, with its share in the domestic market exceeding 30%, and with a stable share in most of its business segments. Moody's also expects that future challenges to KAMAZ's market position -- due to growing competition from global automotive producers -- will be partly mitigated by the company's plans to launch (in 2013-20) new generation of vehicles that are competitive with those of peers. However, the rating agency notes execution risks to these plans. The BCA also positively factors in KAMAZ's close co-operation -- through joint ventures and partnerships -- with leading global auto parts and automotive producers such as Cummins, ZF and KAMAZ's minority shareholder Daimler. Moody's believes this co-operation will (1) increase the competitiveness of KAMAZ's products; (2) help to confer access to enhanced R&D, and best engineering and management practices; (3) help to penetrate other market segments or increase capacity utilisation of KAMAZ's dealership network; and (4) optimise KAMAZ's operations due to outsourcing production of certain auto parts to partners and focusing on key company competencies.

KAMAZ's BCA also factors in the company's focus on efficiency improvements and cost optimisation which, coupled with the partnership with Daimler, has already resulted in strengthening of company's adjusted EBITA margin to 6.4% in 2012 (2011: 3%); and established dealership network in Russia and the Commonwealth of Independent States.

RATING OUTLOOK

The stable outlook on KAMAZ's CFR reflects Moody's expectations of sustained stable business conditions for KAMAZ's Russian trucks markets. The outlook also assumes that the company's strategic plan will result in the gradual renewal of its product portfolio and improvement of profitability whilst maintaining a solid financial profile within a stated financial policy.

WHAT COULD MOVE THE RATING UP/DOWN

Moody's does not envisage positive pressure being exerted on KAMAZ's rating in the next 12-18 months. Nevertheless, Moody's would consider a positive action if (1) conditions in the domestic trucks market remain robust; (2) KAMAZ were continue executing its strategic plan as scheduled; and (3) the company were to demonstrate a track record of solid profitability with EBITA margin of above 7% on a sustainable basis, financial metrics within its stated financial policy, positive free cash flow and a solid liquidity profile.

Downward pressure could be exerted on KAMAZ's rating on evidence of (1) the market environment becoming significantly more challenging than anticipated in terms of volumes or prices, resulting in material deterioration in profitability (measured by adjusted EBITA margin) below 4% on a sustained basis, and in KAMAZ's leverage (measured as adjusted debt/EBITDA) above 3.75x on a sustained basis; and (2) material debt-financed expansion projects and/or acquisitions, or debt-financed dividend payouts to shareholders or other shareholder initiatives, which causes the company to materially deviate from its stated financial policies or above-mentioned financial thresholds and also leads to deterioration of company's liquidity. A one-notch downgrade or upgrade of the sovereign rating would not in itself trigger a rating action on KAMAZ's rating, assuming all the other GRI inputs remain unchanged.

PRINCIPAL METHODOLOGY

The principal methodology used in this rating was the Global Heavy Manufacturing Rating Methodology published in November 2009. Other methodologies used include 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.

OJSC Kamaz (KAMAZ) is a leading player in the Russia market producing a wide range of commercial vehicles, including trucks, trailers, tow tractors and buses. The company also manufactures engines, power units, and various tools and auto parts. Russia's 100% state-owned investment holding "State Corporation "Rosstechnologii" (RosTec, not rated) holds a 49.9% stake in KAMAZ. Another key shareholder is Daimler AG (which owns 15% of KAMAZ's share capital). In 2012, KAMAZ generated revenue of RUB117 million (around $4.0 billion) and adjusted EBIT of RUB6.9 million (around $200 million).

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

Victoria Maisuradze
Associate Managing Director
Corporate Finance Group
Moody's Investors Service Limited, Russian Branch
Telephone: +7 495 228 6060
Facsimile: +7 495 228 6091

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Moody's assigns first-time Ba1 rating to OJSC KAMAZ; outlook stable
No Related Data.
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