OREANDA-NEWS. S&P Global Ratings said today that it has raised its long-term counterparty credit ratings on Russia-based State Transport Leasing Co. PJSC (STLC) to 'BB-' from 'B+'. The outlook is stable.

The 'B' short-term counterparty credit rating was affirmed.

At the same time, we raised our Russia national scale rating on STLC to 'ruAA-' from 'ruA+'.

The upgrade stems from our view that STLC's capital, leverage, and earnings position has improved as a result of the Russian government's plan to inject RUB5 billion (about $77 million) into the company in 2016 and a further RUB30 billion over 2017-2018. We understand the government intends to further support demand for Sukjoi Superjet aircrafts via leasing programs implemented by STLC through the capital injections, as stipulated in its plan for socio-economic development. As a result, we forecast our risk-adjusted capital ratio for STLC before the diversification will remain sustainably above 10% over the next 12 months. This has led us to reassess STLC's capital, leverage, and earnings to strong from adequate, and its stand-alone credit profile (SACP) to 'b+' from 'b'.

Even though STLC's profitability is marginal, we view its business model as stable and supported by its public mandate to modernize the Russian transport sector and support the domestic aviation, maritime, automobile, and machinery industries. This mandate is particularly important in the context of tight economic conditions and increased pressure on the transportation industry, where STLC aims to implement countercyclical measures as well as the government's policy for import substitution.

Our assessment of the company's risk position reflects our view that STLC has high single-name and sector concentrations compared with other leasing companies; the 20 largest borrowers represent about 90% of the gross leasing portfolio. We view the company's asset quality as comparable with that of its peers. Nonperforming loans (including foreclosed assets) represented about 5.3% of total loans at year-end 2015, in line with the peer average of 7%. We still consider the quality of STLC's portfolio to be vulnerable to swings in operating conditions, particularly due to the company's single-name concentration in riskier operating leasing activities. We note, however, that those risks are partly mitigated by special maintenance reserves received upfront in cash from the leaseholder, as well as STLC's growing expertise in residual-value risk management.

We consider STLC's funding profile to be in line with the system average for nonbank financial institutions in Russia. Despite the wholesale nature of its funding sources, STLC adequately finances its long-term leasing exposure with long-term funding. The stable funding ratio was 82.6% at year-end 2015 and we expect it will move closer to 100% over the next few years. The company has also managed to diversify its funding base by placing a debut five-year $500 million Eurobond in July 2016.

In our view, STLC's liquidity is adequate, since the company generates enough cash to cover interest payments and other costs on a monthly basis under our base case. Our cash flow analysis shows that STLC's liquidity buffer covers its monthly requirements by 1.3x, on average.

We continue to consider STLC to be a government-related entity with a moderately high likelihood of receiving extraordinary government. As a result, our long-term rating on STLC is one notch higher than its SACP. Our view of the likelihood of support reflects our assessment of STLC's:Important role as one of the government's policy tools aimed at modernizing the transport sector by purchasing and leasing Russia-produced vehicles and equipment at subsidized rates. We expect STLC will play a central role in the commercialization of Sukhoi Superjets, leasing them to potential buyers; and Strong link with the Russian government, which fully owns STLC and maintains strong oversight of the company's business and strategy. We understand that the company will not be privatized over the next three years. The stable outlook on STLC reflects our view that ongoing capital support from the government will sufficiently cushion risks stemming from difficult operating conditions in Russia.

We could lower the ratings within the next 12 months if the company did not obtain the envisaged capital injections or demonstrated inappropriate capital management, with growth of risk-weighted assets outpacing that of the capital base, resulting in insufficient capital buffers. We could also consider a downgrade if we observed mismanagement of additional risks such as via deteriorated asset quality or residual-value leasing risk, and if the company were put on a sanction list that undermined its ability to tap the international capital markets and reduced its usefulness and importance to the government.

We see the possibility of a positive rating action as remote in the current economic environment.