(The following statement was released by the rating agency)
Sept 17 - Fitch Ratings has affirmed Carcade LLC’s Long-term foreign and local currency Issuer Default Ratings (IDRs) at ‘B+'. At the same time, the agency has upgraded Carcade’s National Long-term rating to ‘A(rus)’ from ‘A-(rus)'. The Outlooks are Stable. A full list of rating actionns is at the end of this commentary.
The affirmation of Carcade’s Long-term IDRs reflects the company’s liquid lease book, which reasonably mitigates risks from a potentially volatile funding base; sound profitability due to solid margins and reasonable asset quality resulting from satisfactory lease contract terms and a rigorous collection function; and significant loss absorption capacity relative to historical loss rates. Funding flexibility also benefits from facilities made available by Carcade’s sister bank, Poland’s Getin Noble Bank SA (‘BB’/Stable).
However, the ratings also reflect Carcade’s still narrow franchise and limited track record; the company’s rapid growth and increasing leverage; the relatively concentrated funding base; and on-going and potential future margin compression as a result of increasing competition.
The upgrade of the National rating reflects Fitch’s view that the company has become a stronger credit within the ‘B+’ IDR category. This in turn reflects greater diversification of the funding base and sound recent performance.
Carcade is in the top-three in the high-margin Russian auto leasing segment, although the market itself is rather narrow (USD5.7bn of new lease contracts in 2011). The pressure on Carcade’s margins is likely to gradually increase as the niche becomes more competitive, with the growing activity of state-owned companies. Sector volumes are also highly cyclical and dependent on the economy’s overall performance.
Carcade has maintained a relatively low cost of risk in recent years, at about 1.2% (annualised) in H112 and 1.3% in 2011, compared to 3% in a more stressed environment in 2009. The generally weak risk profile of lessees is mitigated by significant up-front payments, the high secondary market liquidity of the leased assets (passenger cars) and rigorous collection function. The share of lease contracts overdue by 30 days or more has declined to 4.2% at end-11 from 13.1% in end-2009. The coverage of 30 day overdues by reserves was a satisfactory 50% at end-11.
Funding is drawn primarily from several leading Russian banks, which accounted for about 60% of liabilities at end-H112. The remainder comes from public borrowings and funding from Getin Noble Bank. In Fitch’s view, the company’s third-party funding is potentially volatile, especially in periods of market instability. However, liquidity risk is mitigated by the relatively short duration of assets, and liquidity gaps are positive as the average tenor of bank loans is three years. Fitch also views positively the amortising nature of most funding facilities, which reduces refinancing risks. In addition, the company demonstrated its ability to deleverage in 2008-2009, when it halved its lease portfolio, and potential funding support from Getin Noble Bank adds some comfort.
As Carcade has increased its borrowing to expand the business, leverage has increased, with the debt to equity ratio standing at 4.5x at end-H112 compared to 4.2x at end-2011 and 2.5x at end-2010. The company plans to support capitalisation through profit retention. However, given planned growth of 35% per annum to end-2013, leverage is likely to edge up further even if the recent solid performance (ROAE of 24% in H112) continues. The internal debt/equity threshold is 6x, after which the shareholder will consider a new equity injection.
If Carcade extends its track record of sound performance and is able to withstand competitive pressures, while at the same time maintaining reasonable leverage and containing liquidity risks, then the ratings could be upgraded.
A significant increase in leverage, a marked erosion of franchise or performance due to greater competition, or a sharp deterioration in asset quality due to a downturn in the economy, could put downward pressure on the ratings. A significant weakening of the financial position of Getin Holding (Carcade’s majority owner) or Getin Noble Bank, that reduces the probability of timely liquidity support and gives rise to potential contagion risks, would also be negative for the ratings.
The rating actions are as follows:
Long-term foreign currency IDR: affirmed at ‘B+'; Stable Outlook
Long-term local currency IDR: affirmed at ‘B+'; Stable Outlook
Short-term IDR: affirmed at ‘B’
Long-term National Rating: upgraded to ‘A(rus)’ from ‘A-(rus)'; Stable Outlook
Senior unsecured debt: affirmed at ‘B+', Recovery Rating at ‘RR4’, upgraded to ‘A(rus)’ from ‘A-(rus)'