Fitch affirms Eastcomtrans (Kazakhstan) ratings; outlook Stable

/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]