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
Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
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Moody's assigns first-time Ba1 rating to OJSC KAMAZ; outlook stable
