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Related Issuers
Rating Action:

Moody's downgrades OJSC KAMAZ's CFR to Ba2; negative outlook

13 Oct 2014

London, 13 October 2014 -- Moody's Investors Services has today downgraded to Ba2 from Ba1 the corporate family rating (CFR) and to Ba2-PD from Ba1-PD the probability of default rating (PDR) of OJSC KAMAZ (KAMAZ). The outlook is negative.

RATING RATIONALE

As KAMAZ is 49.9% owned by the Russian government through State Corporation Rosstechnologii (RosTec, unrated) Moody's determines KAMAZ's CFR in accordance with its government related issuer (GRI) methodology, which consists of the following inputs: (1) a baseline credit assessment (BCA) of b2, which measures the company's underlying fundamental credit strength, excluding government support; (2) the Baa1 local-currency rating of the Russian government with a negative outlook; (3) strong probability of the provision of state support to the company in the event of financial distress; and (4) high default dependence between the company and the government. The downgrade was triggered by Moody's decision to lower KAMAZ's BCA to b2 from b1. The other rating inputs of support and dependence are not affected.

Today's downgrade of the BCA to b2 is triggered by Moody's expectation that KAMAZ's financial metrics will weaken in 2014 and 2015. In particular, Moody's expects that KAMAZ's adjusted EBITA margin will reduce below 4% and KAMAZ's leverage (measured by adjusted debt/EBITDA) grows above 4x. This weakening of metrics is driven by the slowdown of the Russian truck market, which is negatively affected by the weakening domestic economy (Moody's forecasts anemic growth of 0.5% of Russia's GDP in 2014 and contraction of GDP by 1% in 2015). In the first half 2014, the domestic truck market contracted by around 20%, which was reflected in the reduction of KAMAZ's revenue and adjusted EBITDA in this period by 10% and 90% respectively in comparison with first half-2013. As of June 2014, KAMAZ's adjusted EBITA margin dropped to 0.6% (FY2013: 4.7%), and adjusted leverage (measured as debt/EBITDA) increased to 6.6x (FY: 2.4x). Moody's also forecasts that government efforts to support the market (such as the recently introduced "utilisation program") will not be sufficient to fully offset negative trends in the truck market but should result in some recovery of the demand.

In addition to market weakness, KAMAZ's profitability will be also negatively affected by around 20% devaluation of the Russian rouble since the beginning of 2014, which will add to cost increases as certain truck components are priced in hard currency. Moody's also forecasts that KAMAZ's leverage will be affected by growing debt in 2015 to finance KAMAZ's capex program, a program aimed at supporting the company's strategy. However, Moody's notes that this new debt will be covered by the RUB35 billion (around $700 million) guarantee which has been recently approved by the Russian state in favour of KAMAZ, which also supports the view that Kamaz should continue to benefit from strong state support.

KAMAZ's BCA also reflects its (1) geographical concentration of sales in Russia, which exposes KAMAZ to the weaknesses and volatility of this particular market; (2) concentration on the production of trucks and spare truck parts (around 85% of revenue in 2013) exposing the company to cycles of the truck market; and (3) modest size in an international context 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.

More positively, the BCA factors in (1) KAMAZ's strong position in the Russian truck market, with its share in the domestic market exceeding 40% and likely to benefit from lower foreign competition; (2) the company's close co-operation through joint ventures and partnerships with leading global auto parts and automotive producers such as Cummins Inc. (A3 stable), ZF Friedrichshafen AG (unrated) and KAMAZ's minority shareholder Daimler; (3) the expectation that the truck market should benefit from the "utilisation program" put in place by the government; and (4) the company's focus on efficiency improvements and cost optimisation.

RATIONALE FOR THE NEGATIVE OUTLOOK

The negative outlook for the ratings reflects Moody's concerns that challenges for the Russian economy as well as in Russian truck market may be deeper and longer than the rating agency currently anticipates, possibly resulting in KAMAZ's (1) continued erosion in sales and/or profitability; (2) increase in leverage above current Moody's expectations, which anticipates leverage not sustainably exceeding 5x; and (3) deterioration of the liquidity position.

WHAT COULD CHANGE THE RATING - UP/DOWN

Given the current negative trends in the domestic track market and negative outlook for the rating Moody's does not envisage positive pressure on KAMAZ's ratings in the next 12-18 months. Nevertheless, Moody's would consider an upgrade if (1) conditions in the domestic trucks market recover and start strengthening; and (2) the company were to demonstrate a track record of solid profitability, with EBITA margin of above 4% on a sustainable basis, financial metrics within its stated financial policy and leverage (measured as adjusted debt/EBITDA) below 3.5x and a solid liquidity profile on a sustainable basis. If the Russian market recovers from a poor first half-2014 and KAMAZ's EBITA margin stabilises above 3%, the rating outlook could be stabilised.

Downward pressure could be exerted on KAMAZ's rating on evidence of (1) the market environment becoming more challenging than currently anticipated in terms of volumes or prices, resulting in a material deterioration in profitability (measured as adjusted EBITA margin) below 2.5% on a sustained basis, and in KAMAZ's leverage (measured as adjusted debt/EBITDA) above 5x on a sustained basis; and (2) material debt-financed expansion projects and/or acquisitions, or shareholder initiatives, which cause the company to materially deviate from its stated financial policies or abovementioned financial thresholds; or (3) liquidity deterioration. A revision of Moody's macroeconomic forecasts might also negatively affect the rating or the outlook. 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 Manufacturing Companies, published in July 2014. 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 2013, KAMAZ generated revenue of RUB114.3 billion (around $3.5 billion) and adjusted EBIT of RUB6.7 billion (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.

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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

Jean-Michel Carayon
Senior Vice President
Corporate Finance Group
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Moody's downgrades OJSC KAMAZ's CFR to Ba2; negative outlook
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