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Related Issuers
Rating Action:

Moody's downgrades Power Machines to Ba2; negative outlook

26 Mar 2015

London, 26 March 2015 -- Moody's Investors Service has today downgraded the corporate family rating (CFR) and the probability of default rating (PDR) of Power Machines OJSC (PM) to Ba2 from Ba1 and to Ba2-PD from Ba1-PD, respectively. The outlook on the ratings is negative.

The action concludes the review for downgrade of PM'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 reflects Moody's expectation that PM, a leading Russian manufacturer of equipment and integrated solution for power generation businesses, will be negatively affected by 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 Moody's view, in this environment, the company's financial flexibility will weaken and leverage may increase to levels not commensurate with the Ba1 rating category for PM's high business risk profile.

Moody's expects a reduction in demand for PM's products and unfavourable adjustments to the company's contractual arrangements with largest government-controlled customers in the Russian power generation sector. Encouraged by the government, these customers are significantly reducing or postponing their capex programmes in the weak economy as well as increasing pressure on suppliers to achieve lower prices and better payment terms, which are likely to translate into heightened working capital requirements for PM. PM's ability to withstand pressure is limited, given the company's modest size, high country, product and customer concentration. As a result, the company's cash flow generation is likely to become more volatile, both reducing the liquidity cushion and driving leverage up to 2x debt/EBITDA or above from 1.5x at end-2014, including Moody's standard adjustments.

Similar to other heavy manufacturers, risks related to contract execution and disputes with customers will continue adding to PM's cash flow volatility. More specifically for PM's developing corporate governance and single ownership, large debt-funded dividend payments of the recent past resulted in a sizeable negative free cash flow. A new dividend policy, if any, aligned with the market environment has yet to materialise.

PM's liquidity remains dependent on the company's cash flow generation, actual capex and dividend policy. PM has significant (over 50% of the total debt portfolio) short-term debt maturities of around $425 million as of end-2014, which were not fully covered by end-2014 cash reserves of $334 million. The gap was covered by availabilities of $335 million under long-term committed facilities, primarily with state-owned banks. However, noted cash generation volatilities continue to weigh on the liquidity buffer.

At the same time, PM's Ba2 rating continues to benefit from (1) the company's dominant position in Russia's market for equipment and solutions for domestic power generators and a sizeable order book valued at around $5.4 billion at end-2014; (2) historically high margins, which implies some level of flexibility for the company in the weak market environment; (3) a cushion under financial metrics for the current Ba2 rating.

RATIONALE FOR NEGATIVE OUTLOOK

The outlook on PM's rating is negative, reflecting PM's exposure to the deteriorating Russian operating environment, which is also captured by the negative outlook on Russia's government bond rating. As a result, PM may face a more severe and rapid reduction of demand and more unfavourable revision of terms of cooperation by its large state-owned customers from the domestic power generation sector, which could lead to negative free cash flow generation, as well as higher leverage and weaker liquidity than anticipated for the Ba2 rating. Moody's will also be monitoring whether a new dividend policy will be introduced to take into account the weak market environment.

WHAT COULD CHANGE THE RATING DOWN/UP

The rating is likely to be downgraded if (1) Russian operating environment deteriorates further resulting in further downgrade of the sovereign rating and/or lowering the sovereign ceiling; (2) PM's financial metrics weaken with debt/EBITDA exceeding 2.5x on a sustained basis, coupled with a strained liquidity.

Given the deteriorating operating environment in Russia and pressure on the sovereign credit quality, PM's weak key markets and the risk of the company's financial profile and liquidity deteriorating, upward pressure on PM's rating is unlikely at present.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Global Manufacturing Companies published in July 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Headquartered in St. Petersburg, Russia, Power Machines OJSC (PM) is a manufacturer of a wide range of electric power generating equipment (turbines, generators, boilers and other equipment) and integrated solutions for electric power plants of all types and sizes. 100% of PM's share capital is indirectly controlled by Mr. Aleksey A. Mordashov. In 2014, PM generated revenue and adjusted EBIT of $1.8 billion and $0.4 billion, respectively.

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.

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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.

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
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Victoria Maisuradze
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
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JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades Power Machines to Ba2; negative outlook
No Related Data.
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