The credit rating of JSC Concern Kalashnikov (hereinafter, Kalashnikov, the Company, or the Concern) has been affirmed due to the Company keeping its credit metrics within the range established for the rating level. In 2021, the Company steadily reduced its debt and annual interest payments, however, at the same time, there was a decrease in the operating profit margin, and when combined these factors had a neutral impact on the rating.
The Company’s credit rating has been determined taking into account state support, in the form of one notch being added to the Company’s standalone creditworthiness assessment (SCA). The Concern’s SCA is based on its strong market position, as Kalashnikov is the leader of the firearms segment, and strong business profile. The medium corporate governance assessment has a neutral impact on the Company’s rating. The financial risk profile assessment is a reflection of the Company’s high profitability and strong liquidity position. The financial risk profile assessment, and consequently the Company’s rating, are constrained by high leverage, low coverage, and a medium free cash flow (FCF) assessment.
Kalashnikov is Russia’s largest manufacturer of firearms, the main supplier of small arms to the Russian Armed Forces, and controls the manufacture of high-precision guided weapons for army aviation. The Kalashnikov brand is well known around the globe; the geographic diversification of Company’s supplies of military products is wide.
KEY ASSESSMENT FACTORS
Strong business profile and market position. The Company is the leader of the Russian firearms industry and an integral part of the entire firearms sector of Russia’s defense industry. The Concern produces more than 95% of small arms in Russia. The Concern’s product portfolio includes a wide range of military and civilian firearms, high-precision equipment, test vehicles, robotic products, and air cannons. The Company has a complete portfolio of orders for the forthcoming years, especially taking into account large contracts with the Russian Ministry of Defense.
The medium level of corporate governance is due to the high assessment of the management strategy as part of a public-private partnership. The Company’s development strategy provides for sustainable growth of its revenues based on further expansion of the product range and development of prospective lines of business. The Agency notes that the Concern has established an effective risk management system aimed at business sustainability and profitability. The Company’s structure is rather complicated but it matches the scale of its business. Financial transparency is acceptable, taking into account the confidential nature of the Concern’s activities.
The financial risk profile assessment is a result of high profitability, medium size of business, low debt service indicators, and high leverage. In 2021, the FFO margin before net interest payments and taxes amounted to 12.7% vs. 18.1% in 2020. ACRA expects the average FFO margin to be around 15% in the forecast period from 2022 to 2024. Most work will be carried out as part of state defense orders, the profitability of which cannot be high. In addition, work will be performed under export contracts, the profitability of which is expected to be higher. In 2021, the leverage ratio (ratio of total debt to FFO before net interest payments) was 7.1x compared to 7.3x in 2020. This indicator declined because the Company’s total debt shrank at a faster rate than operating profits. According to the Agency’s assessments, the leverage ratio will decline in the forecast period, but the rate at which it declines will depend heavily on the conditions for settlements under state defense orders. In its qualitative assessment of the Company’s debt portfolio, ACRA takes into account the specific nature of the portion of the portfolio that is associated with state defense orders. Debt service (FFO before net interest payments to interest payments) in 2021 was 1.96x compared to 1.6x in 2020. ACRA assumes that this indicator will grow slightly in 2022 due to the constraining effect exerted by the sharp growth of interest rates, especially in the first half of the year. In the future, the debt service indicator is expected to grow more steadily due to outpacing growth of operating cash flow.
The Company’s high liquidity stems from the comfortable terms of payment for its products. The Agency notes that defense sector payment regulations imply strict targeted use of advance payments, therefore, not all cash was taken into account by ACRA in its calculations of liquidity. The Agency also notes a significant amount of unwithdrawn loan limits in banks and available credit lines.
In 2021, the Company’s FCF increased to RUB 5.3 bln, which was mainly due to an inflow of funds amid a decline in working capital and capital expenditures. ACRA expects the Company’s FCF to largely remain positive in 2022–2024.
Complete performance of current contracts in the forecast period;
Investment program in line with the Company’s business plan;
No dividend payments in 2022–2024.
POTENTIAL OUTLOOK OR RATING CHANGE FACTORS
The Stable outlook assumes that the rating will highly likely stay unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
Leverage ratio (ratio of total debt to FFO before net interest payments) falling below 5.0x;
Coverage (FFO before net interest payments to interest payments) exceeding 2.5x.
A negative rating action may be prompted by:
- Coverage falling below 1.0x
Support: SCA plus one notch.
JSC «TransKomplektHolding», exchange-traded interest-bearing certificated non-convertible bearer bond subject to centralized title registration, series BO-P01 (RU000A0ZYCR1), maturity date: September 30, 2027, issue volume: RUB 7 bln — A(RU).
JSC «TransKomplektHolding», exchange-traded interest-bearing certificated non-convertible bearer bond subject to centralized title registration, series BO-P02 (RU000A0ZZTK7), maturity date: November 2, 2028, issue volume: 5 bln — A(RU).
JSC «TransKomplektHolding», exchange-traded interest-bearing certificated non-convertible bearer bond subject to centralized title registration, series BO-P03 (RU000A100AZ1), maturity date: April 13, 2029, issue volume: RUB 4 bln — A(RU).
Rationale. The issues are senior unsecured debt instruments of Joint stock company «TransKomplektHolding», the parent company of JSC Concern Kalashnikov, which holds a stake of 75% minus one share. The credit ratings are affirmed based on the issue documentation and an irrevocable public offer, according to which, in case of the issuer’s default, JSC Concern Kalashnikov (the Offeror) will repurchase the bonds, including accrued coupon yield.
Due to the absence of either structural or contractual subordination of the issues, ACRA regards them as pari passu to other unsecured and unsubordinated debt obligations of the Offeror. In line with its methodology, ACRA applied the detailed approach. According to ACRA’s assessment, the recovery rate for unsecured debt belongs to the second category, and therefore the credit ratings of the issues are the same as the credit rating assigned to the Offeror.
The credit ratings have been assigned to JSC Concern Kalashnikov and the bonds (RU000A0ZYCR1, RU000A0ZZTK7, RU000A100AZ1) issued by Joint stock company «TransKomplektHolding» under the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Non-Financial Corporations under the National Scale for the Russian Federation, Methodology for Analyzing Rated Entities Associated with a State or a Group, and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities. The Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments on the National Scale for the Russian Federation was also applied to assign credit ratings to the above issues.
The credit ratings of JSC Concern Kalashnikov and the bonds (RU000A0ZYCR1, RU000A0ZZTK7, RU000A100AZ1) issued by Joint stock company «TransKomplektHolding» were published by ACRA for the first time on August 16, 2017, October 11, 2017, November 15, 2018, and April 26, 2019, respectively. The credit rating of JSC Concern Kalashnikov and its outlook and the credit ratings of the bonds (RU000A0ZYCR1, RU000A0ZZTK7, RU000A100AZ1) issued by Joint stock company «TransKomplektHolding» are expected to be revised within one year following the publication date of this press release.
The credit ratings were assigned based on data provided by JSC Concern Kalashnikov, information from publicly available sources, and ACRA’s own databases. The credit ratings are solicited, and JSC Concern Kalashnikov participated in their assignment.
In assigning the credit ratings, ACRA used only information, the quality and reliability of which were, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.
ACRA provided no additional services to JSC Concern Kalashnikov and Joint stock company «TransKomplektHolding». No conflicts of interest were discovered in the course of credit rating assignment.