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Fitch Rates Element Leasing 'B+'; Outlook Stable
May 31, 2017 / 3:58 PM / 6 months ago

Fitch Rates Element Leasing 'B+'; Outlook Stable

(The following statement was released by the rating agency) LONDON, May 31 (Fitch) Fitch Ratings has assigned Russia-based Element Leasing (EL) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) of 'B+'. The Outlooks are Stable. A Short-Term Foreign Currency of 'B' has also been assigned. KEY RATING DRIVERS The IDRs of 'B+' reflect EL's intrinsic creditworthiness. Although the company benefits from close connections with Basic Element (three out of six members of EL's board are representatives of the group and most of funding is provided by entities affiliated with the group), we do not factor any institutional support into the ratings. This is because EL is formally owned by an unrelated individual, while the ability of Basic Element and its affiliated entities to provide support may be constrained or difficult to ascertain. Basic Element is a large Russian financial-industrial group, with wide business interests, including those in GAZ Group, Ingosstrakh and Bank SOYUZ. EL's business model is focused on providing small-ticket financial leasing of commercial vehicles to SMEs. The franchise is narrow, with a sizable share of GAZ Group brands, which made up over 40% of new business volumes in 2016. Fitch views EL's asset quality as reasonable. Reported impaired lease receivables and foreclosed assets were relatively high at 9% of total lease assets at end-2016, or 41% of equity if net of reserves, but most were represented by granular exposures with reasonable recovery prospects given the company's liquid and adequately valued collateral. However, a smaller part of net impaired assets accounting for a moderate 16% of equity was represented by legacy (dating back to 2008 crisis) foreign-currency (FC) leasing of printing equipment, which may generate further losses. Positively, EL's core auto-leasing portfolio performs well, with negligible final losses in 2016. For past years EL has reported modest financial results (return on average equity (ROAE) of 8% in 2016, break-even in 2015), notably below its peers due to sizable impairment charges (4% in 2016, 3% in 2015) mainly attributable to aforementioned legacy FC exposures, while pre-impairment profitability is strong (pre-impairment ROAE of 33% in 2016, 23% in 2015). Performance is likely to improve on reduced risks from the legacy portfolio and generally strengthened underwriting standards accompanied by a shift of business mix towards more liquid assets (light commercial vehicles and trucks instead of specialised vehicles and non-movable equipment). At end-2016, EL's reported debt-to-equity ratio was at a moderate 5x. However, leverage may increase due to anticipated growth of 30%-40% in 2017 and a historically high dividend pay-out ratio of above 50% amid moderate financial results. At end-2016, more than half of liabilities were raised from financial institutions affiliated with Basic Element, namely Bank SOYUZ (bank loans) and Ingosstrakh (domestic bonds) mitigating refinancing risk to an extent. Its RUB2bn bonds with final maturity in 2019 (31% of end-2016 liabilities) have a put option on 6 June 2017, but according to management, these are mostly held by Ingosstrakh, which did not put them for early redemption prior to cut-off date on 30 May 2017. The remaining debt due in 2017 (a further 24% of liabilities) is well-matched by maturity with proceeds from lease book repayments. RATING SENSITIVITIES EL's IDRs could be downgraded if asset quality and performance weaken significantly, to the extent that this results in a marked increase in EL's leverage ratios or compromises the quality of the company's capital. Upside is currently limited. However, strengthening of EL's franchise, improvement in profitability and diversification of funding sources could be positive for the credit profile. Contact: Primary Analyst Aslan Tavitov Director +44 203 530 1788 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Ruslan Bulatov Associate Director +7 495 956 9982 Committee Chairperson Alexander Danilov Senior Director +7 495 956 2408 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email:; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable Criteria Global Non-Bank Financial Institutions Rating Criteria (pub. 10 Mar 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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