Fitch affirms Eastcomtrans (Kazakhstan) ratings; outlook Stable
12.09.13 11:38
/Fitch Ratings, London/Moscow, September 9, 13, heading by KASE/ – Fitch
Ratings has affirmed Kazakhstan-based Eastcomtrans LLP's (ECT) Long-term
foreign and local currency Issuer Default Ratings (IDR) at 'B', and National
Long-term Rating at 'BB(kaz)'. The Outlook on the ratings is Stable. A full
list of rating actions is at the end of this commentary.
KEY RATING DRIVERS: LONG-TERM IDR
ECT's ratings reflect its high risk concentration by name, industry and region
and vulnerability of its revenue as well as the currently weak market dynamics.
The ratings are supported by strong financial metrics, stable cash generation,
a so far comfortable margin of safety on its main covenants and the entrance of
International Finance Corporation as a minority shareholder.
ECT's earnings to a large extent depend on a single client, Tengizchevroil LLP
(TCO, secured notes rated BBB+/Stable), which accounted for 64% of total revenue
in H113. TCO has announced plans to gradually decrease the share of rail
transportation by switching to pipeline. Concentration risk is partly mitigated
by 10 years history of relationships with TCO and an average contract tenor of
four years. Despite current weak market conditions, future demand for tank
railcars in Kazakhstan is likely to be underpinned by the launch of the
Kashagan project and growth of extraction at existing oilfields.
The growth of ECT's fleet slowed to 4% in H113, compared with 25% in 2012, but
it retains a strong position in the Kazakh rolling stock market, as the largest
private fleet owner with 10,182 cars. While it has a solid position in
Kazakhstan, ECT remains relatively small in the context of the wider CIS market.
ECT maintains comfortable leverage for the rating, with a Fitch estimated total
debt/EBITDA ratio of 3.1x at H113. Newly-acquired wagons have been immediately
contracted out to existing and new customers, supporting earnings generation.
ECT also benefits from a relatively young fleet (four years).
ECT has so far enjoyed stable revenue despite the market stress and a drop in
rent rates. The company has long term contracts with an average remaining tenor
of around 2.5 years as of end-H113. Only 20% of its contracts expire by
end-2013. However, Fitch expects pressure on ECT's revenue as rent rates on
renewed contracts decline to market level.
ECT remains highly reliant on a single individual owning the majority of the
company, and it may have limited capacity to obtain support in the form of new
capital in case of negative market shifts. In view of its growing client base,
ECT's credit profile would benefit from the development of its risk management
function, particularly with respect to liquidity management and counterparty
risk assessment.
Despite its growth track record and a number of new customers, counterparty and
asset concentration remain an issue. The four largest clients account for around
90% of the company's revenues and oil tanker cars represent 56% of ECT's fleet.
On the funding side, ECT issued a USD100m Eurobond in H113 but the debt profile
is still dominated by bank syndicates, which is a function of ECT's small size.
ECT's expansion was funded through secured long-term debt and capital leasing.
The company's main funding facilities require 130% security and are pledged
with its fleet. The fleet valuation is marked to market annually. Thus ECT bears
market risk as it needs to replenish the pledge in case of negative revaluation.
The share of unencumbered fleet was moderate at 22% at end-2012.
As of end-H113, liquidity was adequate for the rating level with stable cash
generation and a USD5m overdraft available. Fitch expects ECT's annual free
cash flow in the near to medium term to sufficiently cover the company's
liquidity needs. However, rapid growth accompanied by a significant increase in
leverage or a sharp decline in utilisation could give rise to a cash deficit in
the medium term. ECT improved its funding structure by channelling USD65m of
the proceeds from the USD100m Eurobond towards repayment of short-term loans to
banks. As the Eurobond has a bullet repayment, the company has a repayment
spike in 2018 but ECT's revenue stream is sufficient to build up enough cash.
RATING SENSITIVITIES: LONG-TERM IDR
An extended track record of solid performance, proven ability to withstand
market cyclicality and greater franchise diversification without a marked
deterioration of the financial profile would be positive for the ratings.
A considerable decline of utilisation, shrinking revenue base or a speculative
acquisition of another leasing company or portfolio resulting in weaker credit
metrics would be negative for the ratings.
KEY RATING DRIVERS AND SENSITIVITIES: SENIOR DEBT RATINGS
The senior debt ratings for the USD100m notes due 2018 are aligned with the
company's IDRs, among other factors reflecting the Recovery Rating soft-cap of
'RR4' for countries, including Kazakstan, that are included in Group D as per
Fitch's 'Country Specific Treatment of Recovery Ratings' report dated 28 June
2013.
The rating actions are as follows:
Long-term IDR affirmed at 'B'; Outlook Stable
Long-term local currency IDR affirmed at 'B'; Outlook Stable
National Long-term Rating affirmed at 'BB(kaz)'; Outlook Stable
Senior secured rating affirmed at 'B', assigned a Recovery Rating of 'RR4'.
Contacts:
Primary Analyst, Aslan Tavitov,Associate Director +7 495 956 7065
Secondary Analyst, Josef Pospisil, Senior Director+44 20 3530 1287
Secondary Analyst, Josef Pospisil, Senior Director+7 495 956 6657
Media Relations:
Julia Belskaya von Tell, Moscow,
tel. + 7 495 956 9908/9901,
julia.belskayavontell@fitchratings.com
[2013-09-12]