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07 Mar 2007
Moody's upgrades corporate family rating of Irkut Corporation to Ba1 from B1 following change in ownership
Moody's Interfax assigns Aa1.ru to Irkut Corporation. Both ratings have stable outlook.
Frankfurt, March 07, 2007 -- Moody's Investors Service has upgraded to Ba1 from B1 the corporate family
rating of Irkut Corporation (Irkut) reflecting the acquisition of a 38.22%
stake by a majority state-owned holding company and application
of Moody's Government Related Issuer (GRI) methodology to assess
a medium level of financial support by the Russian Federation.
The rating action concludes the rating review for upgrade initiated on
14 September 2006. Concurrently, Moody's Interfax Rating
Agency today assigned an Aa1.ru national scale rating (NSR) to
Irkut Corporation. The ratings outlook is stable.
According to Moody's and Moody's Interfax ("Moody's"), the Ba1 global
scale rating reflects the company's global default and loss expectation,
while the Aa1.ru NSR reflects the standing of the company's credit
quality relative to its domestic peers. The Baseline credit assessment
of 16 under the GRI methodology (on a scale of 1-21, where
1 represents lowest credit risk) primarily reflects (1) the strong market
position of Irkut's SU-30MK multi-role jet fighter
among the Indian, Algerian and Malaysian air forces and increasing
exports to other markets; (2) the company's ability to deliver
products which can compete internationally; (3) positive trends of
diversifying the product range into non-defence related areas,
for example the BE-200 multipurpose amphibious aircraft and components
production for EADS; and (4) a solid backlog of signed orders providing
for medium-term revenue visibility.
At the same time, the rating remains constrained by (1) the weak
position with its most significant domestic client, the Russian
military, exposing it to political uncertainties which may affect
business prospects and undermine future revenue potential; (2) concentration
on one foreign customer accounting for a significant part of the order
book; (3) substantial global competition; (4) one main product
accounting for a core part of the revenue and approaching the maturity
of its lifecycle, requiring significant research and development
expenditure to replace the model; (5) the predominance of sales outside
Russia; and (6) a challenging operating environment characterised
by significant political, legal, fiscal and exchange rate
Moody's rating review for possible upgrade had expected to see indications
of comprehensive support for Irkut's operations by the Russian government
in the aftermath of the reorganisation of the Russian aviation industry
and integration of Irkut Corporation into UAC (United Aircraft Corporation).
Such measures may include benefits from state R&D programmes (such
as development of a fifth-generation fighter), as well as
state defence and civil orders to be awarded to Irkut. Even though
UAC has acquired a large stake in Irkut and has also launched a tender
offer for the remaining shares of Irkut, tangible signs of operational
or financial support have not yet been identified.
While Moody's still expects substantial benefits for the participating
companies to result over time from an integrated and consolidated Russian
aircraft industry, the progress of the reorganisation has been slow
so far and has not enhanced Irkut's credit quality to a meaningful
degree to date.
Since the corporate family rating was first assigned to Irkut, the
state has increased its ownership in the company to 38.22%
via UAC, itself a majority state-owned holding company of
Russian aviation activity. Therefore Irkut is rated in accordance
with Moody's Government Related Issuer (GRI) methodology.
Following the application of the GRI rating methodology, the Ba1
corporate family rating now reflects the combination of the following
- Baseline credit assessment of 16 (on a scale of 1-21,
where 1 represents lowest credit risk);
- Local currency rating of the Russian government: Baa2
- Dependence: medium
- Support probability: medium.
The baseline credit assessment of 16 is underpinned by the company's
role as a leading military aircraft producer with an extensive portfolio
of signed contracts and all the other strengths and weaknesses outlined
Moody's GRI assessment assumes a scenario where Russia's recently
announced defence spending program of about $170 billion for the
period 2007-20015 is implemented as scheduled and the aircraft
manufacturers included in UAC will be awarded a sizable share of the orders.
In this scenario, Irkut could benefit over time from a rising volume
of Russian state orders driving a medium probability for financial support
in distress but also would make the company more dependent on the Russian
Federation for their operations.
Medium dependence reflects foremost the expectation of Irkut's rising
share of Russia's aircraft procurements creating an increasing dependence
on state revenues.
Medium support reflects Irkut's strong export performance in high
technology applications, the social and political importance of
the company to the state, anticipated increases in government weapons
procurements for state defence, and increases in state funding to
finance military modernisation.
Moscow-based Moody's Interfax is majority-owned by Moody's,
a leading global rating agency. The Aa1.ru NSR reflects
the same positive factors and is constrained by the same challenges as
the B1 corporate family rating. The upward and downward drivers
for the company's NSRs are the same as those identified by Moody's for
its global scale rating.
Irkut Corporation is a leading military aircraft producer and one of the
largest company in the Russian aerospace & defence industry,
with defence-related revenues in 2005 of over USD602 million and
total company revenue of USD712 million. The order book in 2006
is estimated at USD5.1 billion. Irkut Corporation is the
only public company in the Russian defence industry; the government
currently controls 50.11% of it through Sukhoi Holding and
NATIONAL SCALE RATINGS
Moody's Interfax Rating Agency's National Scale Ratings (NSRs) are intended
as relative measures of creditworthiness among debt issues and issuers
within a country, enabling market participants to better differentiate
relative risks. NSRs in Russia are designated by the ".ru"
suffix. NSRs differ from global scale ratings, as assigned
by Moody's Investors Service, in that they are not globally comparable
to the full universe of Moody's rated entities, but only with other
rated entities within the same country.
ABOUT MOODY'S AND MOODY'S INTERFAX
Moody's Interfax Rating Agency specialises in credit risk analysis in
Russia and is 51% owned and controlled by Moody's Investors Service,
a leading provider of credit ratings, research and analysis covering
debt instruments and securities in the global capital markets.
Moody's Investors Service is a subsidiary of Moody's Corporation
(NYSE: MCO), which reported revenues of US$1.7
billion in 2005, employs approximately 2,900 people worldwide
and maintains offices in 22 countries. Further information is available
Senior Vice President
Corporate Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Vice President - Senior Analyst
Corporate Finance Group
Moody's Eastern Europe
Telephone: +7 495 641-1881
Facsimile: +7 495 641-1897
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