TEXT-Fitch upgrades Eastcomtrans to 'B'; outlook stable
(The following statement was released by the rating agency)
Sept 10 - Fitch Ratings has upgraded Kazakhstan-based Eastcomtrans LLP's (ECT) Long-term foreign and local currency Issuer Default Ratings (IDR) to 'B' from 'B-', and National Long-term Rating to 'BB(kaz)' from 'B+(kaz)'. The Outlook on the ratings is Stable.
RATING ACTION RATIONALE: ECT'S LONG-TERM IDR
The upgrade reflects ECT's decreasing dependence on a single client, Tengizchevroil LLP (TCO, secured notes rated 'BBB'/Stable), the longer average term of contracts, and achieved franchise growth without deterioration of credit metrics.
As ECT has diversified its client base, the share of ECT's revenue that TCO accounted for decreased to 63% in H112 from 76% in 2011 and over 80% in 2010. ECT continues to grow its fleet, retaining a strong position in the Kazakh rolling stock market. ECT also benefits from a relatively young fleet (four years) and solid credit metrics.
In 2011-2012, ECT successfully extended all its major contracts. The contracts with TCO were rolled over to end-2015 and contracts with some of the company's other large clients have also been extended for another one to two years. The average tenor of the contracts reached three years at end-2011.
As of end-August 2012, ECT's fleet had expanded to over 9,600 cars from over 3,000 at end-2010. 2011-2012 growth was achieved with fairly stable credit metrics. The company has maintained comfortable leverage for the rating level. Fitch expects total debt/EBITDA below 3.5x at end-2012. The newly-acquired wagons were immediately contracted out to existing and new customers on a long-term basis.
RATING DRIVERS: ECT'S LONG-TERM IDR
ECT's ratings reflect the company's still quite small and concentrated franchise, dependence on a limited number of funding sources, limitations on the risk management framework and potential corporate governance risks and limited capital flexibility resulting from the ownership structure. At the same time, the ratings also consider the company's sound performance to date, currently comfortable capitalisation and liquidity, and the absence of any sharp refinancing spikes in the debt maturity schedule.
ECT remains highly reliant on a single individual who owns the company, and may have limited capacity to provide support in the form of new capital in case of negative market shifts. With its growing client base, ECT needs to develop its risk management function, particularly with respect to liquidity management and counterparty risk assessment.
Despite the growth and a number of new customers, counterparty and asset concentration remain an issue. The five largest clients provide 90% of the company's revenues: oil tanker cars represent 58% of ECT's fleet. On the funding side, ECT attracted new bank facilities in 2012 but the debt profile is still dominated by bank syndicates (two tranches) which is a function of ECT's small size. ECT has plans to enter capital market via bond placement in 2012-2013 (subject to market conditions).
The company's expansion was funded though long-term amortising facilities (with a pledge over the cars) and capital leasing. As of end-2011, the company's entire fleet was pledged against existing loan facilities. During 2012, ECT has refinanced some of its existing funding agreements, releasing pledges over around 1,100 cars.
As of end-H112, liquidity was comfortable with a stable cash stream and a USD5.5m overdraft available. Fitch expects ECT's annual free cash flow in the near to medium term to sufficiently cover the company's liquidity needs. However, rapid growth accompanied by a significant increase in leverage or a sharp decline in utilisation could give rise to a cash deficit in the medium term.
RATING SENSITIVITIES: ECT'S LONG-TERM IDR
Further extension of the average contract term, greater franchise diversification without a marked deterioration of credit quality and more diversified funding would be rating positive.
A considerable and unexpected decline of utilisation and lease rates or a speculative acquisition of another leasing company or portfolio with weaker credit metrics would be negative for the ratings.
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