OREANDA-NEWS. Fitch Ratings has affirmed JSC Rosagroleasing's (RAL) Long-term Issuer Default Rating (IDR) at 'BB' with a Negative Outlook. A full list of rating actions is available at the end of this rating action commentary.

KEY RATING DRIVERS - IDR
RAL's ratings are driven by potential state support. In assessing potential support, Fitch views positively: (i) RAL's 100% state ownership and track record of past equity injections; (ii) low cost of potential support given the company's small size and leverage (iii) the company's role (albeit somewhat limited) in the execution of state programmes to support the agriculture sector.

At the same time, the two-notch difference between the company's Long-term IDR and those of the Russian sovereign (BBB-/Negative) reflects RALs (i) lower systemic importance and policy role compared with bigger state banks, specifically Russian Agricultural Bank (RusAg, BB+/Negative), in supporting the agricultural sector; (ii) potential weakening of support propensity given the company's poor performance and previous corporate governance flaws leading to large credit losses, as well as potential further problems, which may require extra provisioning.

RAL is a state-owned leasing company focusing on subsidised directed leases to customers from the agricultural sector. Ninety-four per centof the portfolio at end-1H15 comprised leases issued under the government sector support programme and funded by state capital injections with the remainder being commercial leasing funded by bank loans (mainly VTB and RusAg). The subsidised book has been stable in recent years, as the company is using proceeds from lease repayments for issuance of new leases, while the commercial book (and hence lending from third parties) has been gradually decreasing.

Asset quality is weak mainly due to governance failings under previous management prior to 2010, but also because of the volatile performance of the agriculture industry. At end-2014, 53% of net investments in lease were non-performing and reserved by only 45%. In addition RUB15.1bn of lease receivables were problematic, although these were reserved by 93%, and RUB14.7bn of other assets (advances paid and equipment) were potentially at risk but these were reserved by 46% at end-2014.

The aggregate unreserved portion of NPLs and other high-risk/problematic exposures amounted to RUB24.6bn or 45% of equity. Given the company's low leverage (debt-to equity ratio of 11% at end-2014), it has the capacity to comfortably reserve these. However, the newly issued leases are not yet seasoned and may be a source of additional risks.

The lack of growth and capital contributions reflects RAL's legacy problems and its niche role, although the company is still included in the state programme of agricultural development for 2013-2020. Also the head of Ministry of Agriculture is planning to head the Board of Directors of RAL in 2016. RAL expects RUB2bn equity injection in 2016, which will be used for new originations.

RATING SENSITIVITIES- IDR
The ratings could be downgraded if (i) Russia's sovereign ratings are downgraded; (ii) RAL's policy role is diminished; (iii) the company's leverage increases markedly; or (iv) the company's governance continues to fail.

Potential for an upgrade is limited unless the company sees a marked strengthening of its policy role, state support and its corporate governance framework.

KEY RATING DRIVERS AND SENSITIVITIES - NATIONAL RATINGS:
The Stable Outlooks on the National Rating reflect Fitch's view that the creditworthiness of RAL relative to other Russian issuers are unlikely to change significantly in case of a sovereign downgrade.

The rating actions are as follows:
Long-term foreign currency IDR: affirmed at 'BB'; Outlook Negative
Short-term foreign currency IDR: affirmed at 'B'
National Long-term rating: affirmed at 'AA(rus)'; Outlook Stable
Support Rating: affirmed at '3'
Support Rating Floor: affirmed at 'BB'.