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21 Dec 2011
London, 21 December 2011 -- Moody's Investors Service has today changed to stable from negative
the outlook on Irkut's corporate family rating (CFR) and probability
of default rating (PDR). Concurrently, Moody's has
affirmed the ratings at Ba2.
"Today's announcement reflects positive developments in Irkut's
capital structure following debt restructuring arranged by the company's
majority shareholder, JSC United Aviation Corporation (UAC),
which is 83% owned by the Russian Federation via its Agency for
Administration of Governmental Property," says Julia Pribytkova,
a Moody's Vice President -- Senior Analyst and lead
analyst for Irkut. The restructuring was completed in 2011 and
involved (i) UAC increasing its participation in Irkut to 85.36%
from 82.55% via a new share issue amounting to USD151 million;
and (ii) Irkut refinancing a USD371 million loan from Sberbank with a
long-term, interest-free shareholder loan from UAC.
Moody's believes that following the restructuring, Irkut's
leverage and coverage metrics, as well as its liquidity profile,
have become consistent with the company's assigned Baseline Credit
Irkut demonstrated an improvement in its operating performance in 2010-11,
which was reflected by the company's robust revenue growth (2010:
27% year-on-year, 2011: estimated 11%
year-on-year), sustainably improved profitability
and stronger coverage metrics. Irkut's revenue generation
in 2012-14 is supported by the company's order book of signed
projects. This amounts to approximately USD2.0 billion and
comprises the delivery of military aircrafts to Algeria and India and
contracts with the Ministry of Industry and Trade of Russia and Airbus/EADS
for spare parts manufacturing. In addition, the company is
working on its first civil project, the MC-21 medium-range
jet, the production of which is expected to start in 2016.
Irkut's MC-21-related research and development (R&D)
costs are fully reimbursed by the Government of the Russian Federation,
in accordance with the state strategy of supporting the national aviation
By virtue of its current ownership structure (85.36% owned
by UAC and 9.97% by OJSC "Aviation Holding company
Sukhoi", the developer of the SU-30 multi-role
jet fighter), Moody's considers Irkut to be a government-related
issuer (GRI). As such, Irkut's Ba2 CFR incorporates
the following four inputs: (i) a BCA of 16 (on a scale of 1 to 21,
where 1 represents the lowest credit risk); (ii) the local currency
rating of the support provider, the Russian government --
Baa1 with a stable outlook; (iii) moderate default dependence;
and (iv) the strong likelihood of support from Irkut's ultimate
shareholder. Please refer to Moody's Rating Methodology of
July 2010 "Government-Related Issuers: Methodology
The BCA of 16, equivalent to a rating of B3, reflects several
concerns that Moody's has, as follows: (i) Irkut's
prevailing concentration on a single product, the SU-30MKI,
which accounts for 73% of the company's order book in 2012-14;
(ii) the restricted time horizon in which this military product is likely
to enjoy demand and its limited customer base, as well as the absence
of an up-to-date, ready-to-manufacture
replacement product; (ii) risks associated with the R&D of the
company's first civil aircraft, the MC-21, and
potential delays in its mass production; and (iii) a high degree
of cash flow generation unpredictability as a result of the prevailing
contract payment terms (Moody's envisages that advance payments
for contracts generally do not exceed 30% of the contract value,
with the bulk paid upon delivery of the product). This cash flow
generation unpredictability is driving substantial working capital fluctuations,
which are exacerbated by the long production cycle and capital-intensive
nature of the industry in which the company operates. Moody's
notes that liquidity constraints arising from Irkut's operating
model are largely mitigated by (i) the Russian government's view
of Irkut as a strategic asset; and (ii) its willingness to provide
support via recapitalising the company or assisting in the refinancing
of its debt, including with shareholder loans from UAC.
The rating assessment takes into account the currently strong market demand
for Irkut's major product, the SU-30MK multi-role
jet fighter, from the Indian, Algerian and Malaysian air forces,
reflected in the contracts signed, and increasing export opportunities
to other markets. Moody's positively notes the company's
efforts to diversify into non-defence areas, and its arrangement
with the Russian government whereby related research and development works
are compensated by the state subsidies on a cost-plus basis.
The rating agency also notes that Irkut benefits from below-market
cost of capital as a result of a mechanism whereby the Russian government
reimburses the interest expense associated with the company's key
The input of moderate default dependence reflects Moody's expectation
that Irkut will remain reliant on the state for a large portion its aircraft
procurement orders and therefore revenues.
Moody's assessment of strong support reflects (i) Irkut's
strong export performance in high-tech applications; (ii)
the social and political importance of the company to the state;
and (iii) anticipated increases in the state funding of military modernisation
and government defence procurement. Moody's assessment of
support is further underpinned by the government's announced intention
to invest up to RUR65.5 billion (more than USD2.0 billion)
in the Russian aviation industry in 2012-25, including a
RUR6 billion (USD194 million ) capital injection into UAC.
Moody's assesses Irkut's liquidity as adequate, given
that it is underpinned by the expected cash flows and available loan facilities
from Sberbank in the next 12 months. Among the concerns pertaining
to Irkut's liquidity assessment, the rating agency notes (i)
high degree of unpredictability of the company's cash flow generation
stemming from the lengthy production cycle and limiting visibility on
the company's potential liquidity constraints, and (ii) refinancing
risk in the second quarter 2013 when approximately US$230 million
of debt facilities become due. Moody's will closely monitor
the company's liquidity management over the next 18 months.
The stable outlook reflects our expectation that Irkut will sustain current
levels of revenue, profitability leverage and capitalisation,
and will continue to enjoy strong implicit and explicit support from the
WHAT COULD CHANGE THE RATING UP/DOWN
Upward pressure on Irkut's BCA could develop if there were to be
positive developments in the company's business profile, particularly
increased product diversification and an enlarged customer base,
alongside a strong financial performance. Timely replenishment
of the backlog of orders and better visibility of cash flows would have
a positive effect on the ratings.
Conversely, Moody's would consider downgrading the rating
in the event of (i) negative business profile developments, i.e.,
Irkut's order backlog decreasing as a result of lower market demand
for the company's military products; (ii) a failure to develop,
test and obtain necessary certifications for the new civil aircraft in
a timely manner to sustain production levels; and (iii) depressed
profitability and weak cash flow generation, translating into liquidity
constraints. In addition, a deterioration in Irkut's
leverage and coverage metrics below the levels assumed for the current
BCA would have a negative effect on the ratings.
Any indication of a change in state support and/or dependence levels,
as well as the supporter's credit standing, would trigger
a revision of the GRI assumptions and potentially of the company's
The principal methodology used in rating Irkut Corporation ("Irkut")
was the Global Aerospace and Defense Industry Methodology published in
June 2010. Please see the Credit Policy page on www.moodys.com
for a copy of this methodology.
Irkut Corporation ("Irkut") is a leading military aircraft producer and
one of the largest companies in the Russian aviation industry.
In 2010 the company reported revenues of USD 1.7 billion (27%
increase year on year). The order book as of December 2011 is estimated
at USD 5.7 billion. Irkut is 85.36% owned
by holding company United Aircraft Corporation (UAC, 83%
owned by the Russian Federation via its Agency for Administration of Governmental
Property), 9.97% by OJSC "Aviation Holding company
Sukhoi" (91.68% owned by UAC); 4.67%
of shares are in free float.
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant 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
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rating practices. For ratings issued on a support provider,
this announcement provides relevant 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 relevant 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.
The rating has been disclosed to the rated entity or its designated agent(s)
and issued with/with no amendment resulting from that disclosure.
Information sources used to prepare the rating are the following :
parties involved in the ratings, public information, and confidential
and proprietary Moody's Investors Service information.
Moody's considers the quality of information available on the rated
entity, obligation or credit satisfactory for the purposes of issuing
Moody's adopts all necessary measures so that the information it
uses in assigning a rating is of sufficient quality and from sources Moody's
considers to be reliable including, when appropriate, independent
third-party sources. However, Moody's is not
an auditor and cannot in every instance independently verify or validate
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Moody's Investors Service may have provided Ancillary or Other Permissible
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Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Limited, Russian Branch
7th floor, Four Winds Plaza
21 1st Tverskaya-Yamskaya St.
Associate Managing Director
Corporate Finance Group
Moody's changes Irkut's outlook to stable from negative, affirms ratings at Ba2
Moody's Investors Service Ltd.
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