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Rating Action:

Moody's changes DLR's outlook to positive, assigns B1 rating with positive outlook to ROLF; will withdraw DLR's ratings

11 Dec 2018

London, 11 December 2018 -- Moody's Investors Service (Moody's) has today changed to positive from stable the outlook on the B1 corporate family rating (CFR) and B1-PD probability of default rating (PDR) of Delance Limited ROLF (DLR), which owns Russia's largest foreign-branded cars retailer LLC ROLF (ROLF). Concurrently, Moody's has affirmed these ratings.

Moody's has also assigned a B1 CFR and a B1-PD PDR to ROLF. The outlook on the ratings is positive. The rating agency will subsequently withdraw the B1 CFR, B1-PD PDR and positive outlook of DLR. The assignment of ratings to ROLF and the pending withdrawal of the ratings of DLR follow the company's corporate reorganisation, under which the company has formed a Russia-domiciled subholding, ROLF, which now consolidates all the group's assets and will be the reporting entity for the consolidated group going forward.

RATINGS RATIONALE

-- CHANGE OF OUTLOOK TO POSITIVE --

The change of outlook on the company's B1 ratings to positive from stable reflects Moody's expectations that ROLF will sustain its strong operational and financial performance through industry cycles and pursue a balanced financial policy, that could translate into a credit profile commensurate with a higher rating.

The company's leading market position and track record of outperforming the market over the past five years, while maintaining relatively stable profitability, suggest it will see sustainable growth in earnings over the next 12-18 months, supporting its leverage. ROLF's diversified business - new car sales, used car sales, car services and complementary financial services - shields the company from the industry's volatility. Its strong operating cash generation and limited capital spending should result in positive pre-dividend free cash flow in 2019-20.

Moody's also expects the company to continue to manage its leverage and liquidity prudently, follow a cautious development strategy and pursue its balanced financial policy, which somewhat mitigates a risk of concentrated ownership. Sizeable and regular shareholder distributions, which weigh on ROLF's free cash flow, are likely to remain within the expectations shaped by the financial policy which envisages the net leverage (net debt to EBIDA) within the 2.0-3.0 range.

-- ASSIGNMENT OF B1 RATING --

ROLF's B1 rating factors in the company's (1) leading position in Russia; (2) the recovering car market, which grew 14% in the first 11 months of 2018 and 12% in full-year 2017, after a four-year continuous decline; (3) its robust and resilient business model, with a comprehensive product offering; (4) its balanced financial policy, with a target of net debt/EBITDA of 2.0x-3.0x on a reported basis; and (5) rouble-denominated debt and diversified pool of banks.

ROLF also benefits from its strong and diversified brand portfolio, whereby no single brand exceeds 25% of total car revenue, and solid position in the premium segment, which commands higher margins. Its business profile is strengthened further by its (1) fast growing used car segment, which features higher margins, compared with that of new car sales; (2) well-developed service business, which is more profitable and less cyclical; (3) established complementary financial services segment, which generates attractive margins; and (4) constant focus on efficiency improvements and strict cost controls. The company accounts for 11% of car dealers' revenue in Russia and holds the number one position in Moscow and Saint Petersburg, which are the largest and most lucrative markets in Russia for foreign-branded vehicles and the premium segment in particular.

ROLF's strong business model and prudent development strategy help the company successfully cope with industry cycles and constantly outperform the market. Thus, in 2016, ROLF reported revenue growth of 31%, compared with an 11% market decline. In 2017, the company posted 21% growth, versus overall market growth of 12%. ROLF is likely to increase its sales at a rate of above 20% in 2018-19 and maintain adjusted EBITDA margin within 4.4%-5.0% because of its operational leadership and healthy market fundamentals in the short term.

Moody's expects ROLF to gradually improve credit metrics, with Moody's-adjusted debt/EBITDA falling below 2.5x in 2019 from 2.9x in 2017 and 3.6x in 2016 and EBIT/interest expense rising to around 4.0x in 2019 from 2.8x in 2017, driven by earnings growth.

At the same time, the rating takes into account the company's (1) exposure to the highly volatile Russian car market, which plummeted to 1.4 million new car sales in 2016 from 2.8 million in 2013; (2) relatively small size, although it is steadily growing, compared with that of its rated global peers; (3) lack of geographical diversification across Russian regions, with operations concentrated in the two highly competitive cities, Moscow and Saint Petersburg; (4) private ownership, which creates the risk of rapid changes in the company's strategy and development plans, along with the risk of revisions to its financial policies; (5) sizeable and regular shareholder distributions, resulting in negative free cash flow despite strong operating performance; and (6) exposure to Russia's less-developed regulatory, political and legal framework.

-- WITHDRAWAL OF DLR'S RATINGS—

Moody's will subsequently withdraw DLR's ratings because of the corporate reorganisation, as a result of which the company has formed a Russia-domiciled subholding, ROLF, which now consolidates all the group's assets and will be the reporting entity for the consolidated group going forward. Therefore the CFR has been reassigned to ROLF. Please refer to the Moody's Investors Service's Policy for Withdrawal of Credit Ratings, available on its website, www.moodys.com.

RATIONALE FOR THE POSITIVE OUTLOOK

The positive outlook reflects the positive dynamics in the company's operational and financial performance over the past 18 months, which, if sustained, could translate into the ratings' upgrade over the next 12-18 months, subject to the company (1) maintaining its improved leverage, and sound financial and operating performance; and (2) pursuing a balanced financial policy, appropriately sizing shareholder distributions.

WHAT COULD CHANGE THE RATING UP/DOWN

Moody's could upgrade the rating if the company was to (1) maintain healthy operating and financial performance; (2) adhere to its prudent financial policy, with Moody's-adjusted debt/EBITDA below 3.0x on a sustainable basis; and (3) manage its liquidity prudently.

Moody's could stabilise the outlook if the company's dividend payments were to elevate materially from the expected levels or operating performance was to deteriorate, limiting upward potential for the rating. Moody's could downgrade the rating if ROLF's (1) adjusted debt/EBITDA was to rise above 4.0x on a sustained basis, as a result of weakening conditions in the Russian automotive market or the company's more aggressive development and financial strategy; (2) operating cash flow generation were to weaken materially; and (3) liquidity was to deteriorate.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Retail Industry published in May 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

ROLF is the largest retailer of foreign-branded cars in Russia, including mass brands (such as Mitsubishi, Ford, Hyundai, Mazda, Nissan, Renault, Skoda, Toyota, Volkswagen and KIA) and premium market brands (such as Audi, BMW, Land Rover, Mercedes-Benz, Lexus, Jaguar, Porsche and Jeep). The company operates 62 showrooms in Moscow and Saint Petersburg. In 2017, ROLF sold around 84,000 new and 48,000 used cars and generated RUB180 billion in revenue. The company is ultimately controlled by a trust acting in the interests of the Petrov family.

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.

Mikhail Shipilov
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
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

Releasing Office:
Moody's Investors Service Ltd.
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JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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