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Rating Action:

Moody's downgrades Kamaz's CFR to Ba3; negative outlook

25 Mar 2015

London, 25 March 2015 -- Moody's Investors Service has today downgraded to Ba3 from Ba2 the corporate family rating (CFR) and to Ba3-PD from Ba2-PD the probability of default rating (PDR) of Kamaz OJSC (Kamaz), a leading Russian truck producer. The outlook on the ratings is negative.

The action concludes the review for downgrade of Kamaz's ratings, which was part of the review for downgrade of ratings of 45 Russian non-financial corporates launched by Moody's on 23 December 2014. The review was prompted by the severe and rapid deterioration in the operating environment in Russia and the heightened risk of a more prolonged and acute economic downturn than originally expected.

RATINGS RATIONALE

Today's downgrade of Kamaz's rating to Ba3 from Ba2 was triggered by deterioration in Kamaz's standalone creditworthiness, as measured by the company's baseline credit assessment (BCA), to b3 from b2 under Moody's government related issuer (GRI) methodology. That said, Kamaz's Ba3 rating continues to factor in sizeable uplift to its b3 BCA, given Moody's assumption of the strong probability of state support in the event of financial distress. Moody's views Kamaz as a GRI as it is 49.9% owned by the Russian government (Ba1 negative) through State Corporation Rosstechnologii (RosTec, not rated). The support assumption considers a RUB35 billion ($574 million) guarantee issued by the government to cover Kamaz's new borrowings to fund its capex programme.

The deterioration of Kamaz's standalone creditworthiness has been driven by the severe and rapid downturn in demand for the company's products on the back of the weakening of Russia's economic and financial environment, as captured by Moody's downgrade of Russia's sovereign rating and country ceiling to Ba1 from Baa3 with negative outlook on 20 February 2015. In the first half of 2014, the domestic truck market contracted by around 20% according to Moody's estimate, pressuring Kamaz's EBITA margin to 0.6% and driving up leverage to 6.6x debt/EBITDA as of mid-2014 (the ratios include Moody's standard adjustments). A special government programme temporarily supported the demand for trucks in the fourth quarter of 2014, but did not reverse the overall negative trend.

In addition to market weakness, Kamaz's profitability was also negatively affected by a significant depreciation of the Russian rouble in 2014, which added to cost increases as some truck components are priced in hard currency, while the bulk of revenues is generated in roubles. Having projected a contraction of Russia's GDP by 5.5% in 2015 and by 3% in 2016, Moody's does not expect a material recovery in the Russian truck market and hence in the company's financial profile in the next 12-18 months, with EBITA margin and leverage remaining below 2.5% and above 5x, respectively, which is commensurate with the b3 BCA.

Moody's considers Kamaz's end-2014 liquidity as adequate, given that its short-term debt obligations are covered by cash reserves of RUB9.4 billion and long-term committed credit facilities of around RUB10.7 billion predominantly with state-owned banks. The government guarantee, which should cover new borrowings to fund capex, will also mitigate pressure on the company's liquidity in the weak operating environment while allowing the company to continue with its modernisation programme.

Kamaz's b3 BCA remains underpinned by (1) Kamaz's strong position in the Russian truck market, with its share in the domestic market exceeding 40%; (2) co-operation through joint ventures and partnerships with leading global auto parts and automotive producers such as Cummins Inc. (A2 stable), ZF Friedrichshafen AG (unrated) and Kamaz's minority shareholder Daimler AG (A3 positive); and (3) the company's focus on efficiency improvements and cost optimisation.

RATIONALE FOR THE NEGATIVE OUTLOOK

The negative outlook on Kamaz's rating reflects the negative outlook on the Russian sovereign rating and concerns over the further weakening of Russia's operating environment and hence of the Russian truck market, which may result in further deterioration of the company's financial profile and liquidity position.

WHAT COULD CHANGE THE RATING DOWN/UP

Kamaz's rating could be downgraded if (1) Moody's sees a worsening of the Russian operating environment and sovereign creditworthiness; (2) the company's key market weakens and its financial and/or liquidity profile deteriorates; or (3) there is a revision downwards of Moody's assessment of the probability of the Russian government providing extraordinary support to Russian GRIs and/or Kamaz in particular in the event of financial distress.

Given the current negative trends in the domestic trucks market and negative outlook on Kamaz's rating, Moody's does not envisage positive pressure on the rating in the next 12-18 months. Nevertheless, Moody's would consider an upgrade if (1) conditions in the domestic trucks market recover and stabilise; and (2) the company improves its liquidity and there is a sustainable recovery in its margins and financial metrics, with EBITA margin trending above 2.5% and leverage below 5x.

PRINCIPAL METHODOLOGY

The principal methodology used in this rating was Global Manufacturing Companies published in July 2014. Other methodologies used include Government-Related Issuers published in October 2014. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Kamaz OJSC (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 the last 12 months through June 2014, Kamaz generated revenue of RUB108.8 billion (around $3.2 billion) and adjusted EBIT of RUB548 million (around $16 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.

Ekaterina Botvinova
Vice President - Senior 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
Telephone: +7 495 228 6060
Facsimile: +7 495 228 6091

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Moody's downgrades Kamaz's CFR to Ba3; negative outlook
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