OREANDA-NEWS. December 23, 2015. Fitch Ratings has maintained Europlan JSC's 'BB' Long-term Issuer Default Ratings (IDRs) and senior debt rating on Rating Watch Negative (RWN). A full list of rating actions is at the end of this rating action commentary.

KEY RATING DRIVERS
The RWN continues to reflect uncertainty about the impact of Europlan's acquisition by the B&N group on the company's capitalisation and governance, and potential risks relating to exposure to the broader group. The 'BB' ratings reflect Europlan's significant franchise, so far conservative management and risk appetite, and sound financial metrics. Europlan is one of the leading privately-owned leasing companies in Russia, focusing on auto leasing (passenger cars, trucks and light commercial vehicles) to primarily SME customers.

Europlan has continued to demonstrate sound performance in 2015, notwithstanding tougher operating conditions. Asset quality metrics modestly deteriorated, but final credit losses remained very low (equal to just 0.2% of the lease portfolio in 9M15) as higher write-offs were offset by gains on sales of foreclosed assets. The gains were supported by low LTVs, rouble inflation of leased asset values and the company's shifting focus towards the passenger car segment, where leased assets are more liquid.

Default rates in the lease book were around 5% (annualised) in 9M15, which was in line with 2014 and notably below the levels recorded in 2008-2009. Foreclosed assets on the balance sheet amounted to a low 9% of capital at end-9M15.

Europlan continued to demonstrate strong profitability in 9M15, with an ROAE of 24% (annualised), as the company was able to preserve its margins, and control both operating costs and credit losses. Fitch expects profitability to moderate in 2016 - but still remain sound - due to (i) an increase in funding costs, as the company's new borrowings price at around 2ppts higher than its current average cost of funding (11.4% at 9M15); and (ii) further amortisation of the lease book, as demand contracts.

Europlan's already strong reported leverage improved further in 2015, as the debt to equity ratio fell to 3.1x at end-11M15 from 4.1x at end-2014. The end-11M15 ratio is calculated after adjusting equity for a RUB0.6bn receivable from the shareholder, which is expected to be netted against future dividends.

Management has informed Fitch that it plans to moderately increase reported leverage in 2016, as a result of a dividend payment, but in the near-term debt/equity should still remain significantly below the targeted 4x, which is solid. The company's capital position in a stress scenario could also benefit from its proven ability to deleverage quickly without material losses, as was the case in 2015 and 2009.

However, Fitch's assessment of capitalisation is negatively affected by significant double leverage at Europlan's ultimate holding company, which financed the majority of Europlan's acquisition with debt. The agency has been informed that this double leverage will be eliminated in 1H16 as a result of a restructuring of the company's ownership. However, this will result in the planned holding of a majority of the B&N-controlled stake by group pension funds, rather than its owner directly.

Europlan's liquidity is supported by good matching of asset and funding maturities and reasonable diversification of funding sources, which include domestic bonds and loans from a number of Russian banks. FX risks are negligible, as the company operates with a predominantly rouble balance sheet.

At end-9M15, Europlan's liquidity cushion of RUB10.5bn consisted primarily of RUB7.5bn of placements with another Russian bank. These placements increased significantly in 3Q15 after B&N acquired Europlan and the company sold a RUB5bn bond to B&N-controlled pension funds. Europlan management informs Fitch that the bank placements are unencumbered. However, the agency cannot exclude the possibility that they may be related to financing of other group assets or the acquisition of Europlan itself.

RATING SENSITIVITIES
The ratings could be downgraded if Fitch concludes that Europlan's balance sheet management, governance and underlying leverage have weakened significantly as a result of the acquisition by B&N group, or if in Fitch's view the company is likely to be exposed to significant contingent risks from the other assets of its owners. The ratings could be affirmed if Fitch concludes that the acquisition has been broadly neutral for Europlan's credit profile. Fitch expects to resolve the RWN after the planned restructuring of the company's ownership.

In line with other privately-owned Russian leasing companies, Europlan could also be downgraded 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 support the affirmation of the ratings, contingent on Fitch not viewing broader group-related risks as significant.

The rating actions are as follows:
Long-term foreign and local currency IDRs: 'BB', maintained on RWN
Short-term foreign-currency IDR: affirmed at 'B'
National Long-term Rating: 'AA-(rus)', maintained on RWN
Senior unsecured debt: 'BB'/'AA-(rus)', maintained on RWN