OREANDA-NEWS. December 16, 2015. Fitch Ratings has upgraded Baltic Leasing OJSC's (BaltLease) Long-term Issuer Default Ratings (IDRs) to 'BB-' from 'B+'. Fitch has also affirmed Carcade LLC's IDR at 'BB-' and removed it from Rating Watch Negative (RWN). The Outlooks on both companies' IDRs are Negative. A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS
The upgrade of BaltLease reflects our reassessment of its credit profile relative to peers, as well as a longer track record of good asset quality metrics, improved funding and capital profiles, and reasonable financial results in a challenging operating environment. The Negative Outlook reflects the risks of a weaker economic environment, which may negatively affect asset quality/collateral disposals.

The recent change of ownership (the company is now 80% owned by Tactics group, a company with business interests mainly in the real estate and development sector) may also be a source of contingent risk, as Fitch understands the shareholders could raise some debt to buy the stake and there is limited transparency on the acquisition structure. Fitch understands that the new shareholder has a longstanding business relationship with Otkritie group; in the agency's view, before the sale BaltLease had been owned mainly by parties connected to Otkritie.

Fitch placed Carcade's ratings on RWN in August 2015 due to risks from the potential change of the company's strategy, risk appetite, balance sheet structure and financial metrics upon the expected sale of the company to B&N group (see "Fitch Places Carcade on Rating Watch Negative" dated 20 August 2015). However, the deal was cancelled, so the ratings have been removed from RWN and affirmed reflecting the company's good liquidity and solid solvency. The Negative Outlook is due to moderate deterioration of asset quality and financial performance, as well as potential further pressure on metrics from the difficult operating environment including in the core car/SME segments.

The companies are among the leading private leasing companies in Russia. Carcade is a pure retail autoleasing company (passenger cars, light commercial vehicles and trucks made up 97% of the lease book at end-3Q15), while BaltLease has a more diversified, albeit less liquid lease book (passenger cars, LCV and trucks made up only 48% of the lease book at end-3Q15, while the remainder was special-purpose equipment).

Asset quality metrics moderately deteriorated in 2015. Default rates in the lease book increased to 13% at Carcade in 1H15 and 4% at BaltLease in 9M15 (both annualised) from 11% and 2%, respectively, in 2014. However, the current default rates are still notably below 2008-2009 maximum levels (about 20% in Carcade and 8% in BaltLease). Final credit losses were much lower due to efficient foreclosure and sales of relatively liquid collateral: 0.2% in 3Q15 for BaltLease and 2.5% in 1H15 for Carcade (both annualised). Foreclosed assets on the balance sheet are higher for Carcade (45% of equity at end-1H15) compared with BaltLease (4% at end-9M15), but residual/collateral value risks are mitigated by low LTVs and rouble devaluation, which supports rouble prices (as most assets are foreign/imported).

Solvency, as expressed by the net debt to tangible equity ratio, was somewhat weaker at 5.9x for Carcade (this is adjusted for a receivable from the shareholder, which is expected to be netted against future dividends) and a solid 4.4x for BaltlLease. Both companies rely on internal capital generation and Fitch does not incorporate external capital support in its assessment. Capital positions in a stress scenario could benefit from the companies' proven ability to deleverage quickly without material losses.

FX risks are negligible, as both companies operate with essentially rouble balance sheets.

The companies have moderate liquidity cushions, but their assets are granular and generate stable and predictable cash flows matching/exceeding expected debt maturities. BaltLease's liquidity position is somewhat stronger due to its longer-term funding profile largely in the form of domestic bonds, which Fitch understands are held predominantly by Otkritie group banks.

Profitability moderated due to increased funding costs. Carcade suffered a nearly 3pp hike due to a high share of floating rate borrowings, which coupled with higher credit losses resulted in it being only close to break even in 1H15. BaltLease was less affected (only by 1pp increase of funding costs) due to more favourable terms of funding. This allowed the company to preserve its margin and earn a strong 30% ROAE (annualised).

The senior debt ratings are aligned with the companies' IDRs and National ratings. BaltLease has issued bonds via its core operating subsidiary, Baltic Leasing LLC.

RATING SENSITIVITIES
The companies could be downgraded if asset quality and performance weaken significantly causing erosion of solvency, or in case of a further material deterioration in the operating environment. An extended track record of reasonable performance and a stabilisation of the operating environment could result in the Outlooks being revised to Stable.

The senior debt ratings could be downgraded in case of a downgrade of the IDRs/National ratings, or a marked increase in the proportion of pledged assets (which is now low for BaltLease and moderate for Carcade), potentially resulting in lower recoveries for the unsecured senior creditors in a default scenario.

The rating actions are as follows:

BaltLease
Long-term foreign and local currency IDRs: upgraded to 'BB-' from 'B+'; Outlooks Negative
Short-term foreign-currency IDR: affirmed at 'B';
National Long-term Rating: upgraded to 'A+(rus)' from'A-(rus)'; Outlook Negative
Senior unsecured debt of Baltic Leasing LLC: upgraded to 'BB-'/'A+(rus)' from 'B+'/'A-(rus)'/Recovery Rating 'RR4'

Carcade
Long-term foreign and local currency IDRs: affirmed at 'BB-'; removed from RWN, Outlook Negative
Short-term foreign-currency IDR: affirmed at 'B'
National Long-term Rating: affirmed at 'A+(rus)'; removed from RWN, Outlook Negative
Senior unsecured debt: affirmed at 'BB-'/'A+(rus)'; removed from RWN