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May 20 (The following statement was released by the rating agency)
Fitch Ratings has affirmed JSC AvtoVAZ's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'B-' and Short-term foreign and local currency IDRs at 'B'. The agency has also affirmed the foreign and local currency senior unsecured rating at 'B-' Recovery Rating 'RR4' and National Long-term rating at 'BB(rus)'. The Outlook for the long-term ratings is Stable.
KEY RATING DRIVERS:
AvtoVAZ's B- Long-term IDR is dependant on government support. Government support, has already been tested in the recent past and is also reflected by a further prolongation of state interest-free debt in the amount of RUB51bn to 2032. Given the economic and social importance of AvtoVAZ, Fitch believes that state support will be maintained in case of need.
Expected Change of Ownership
In Q412, Renault and Nissan signed a binding agreement with state-owned Rostec (former Russian Technologies, the owner of 29% of AvtoVAZ) which stipulates that both companies will jointly invest up to USD750m in AvtoVAZ by mid-2014 thereby increasing their combined effective stake in the issuer to 50.01%. Given weak legal ties and limited tangible support in cash from Renault and Nissan, the change of ownership will not automatically trigger a rating upgrade.
Cooperation with Renault-Nissan Positive
In line with the 10-year strategy elaborated with the Renault-Nissan alliance, AvtoVAZ is updating its product portfolio from outdated cars to newer and more modern models. Other areas of cooperation include improvement of quality issues and joint purchases. Fitch believes that this cooperation will gradually benefit AvtoVAZ's financial profile in coming years.
Market Share to Stabilise
AvtoVAZ's Russian market share decreased to 19.5% in 2012 from 23% in 2011. It was hit by the end of governmental stimulus programmes from which it was the main beneficiary and from relative higher growth in higher-end segments from which it is absent. However, Fitch expects AvtoVAZ's new models including vehicles developed with Renault and Nissan to sustain market share in the 18%-20% range over the next 2-3 years.
Growing Though Volatile Market
In line with Fitch's expectations, Russian car market decelerated in 2012 although exceeded its pre-crisis level. The Russian market has been the second largest European market since 2011. The agency expects mid-single digit growth in the foreseeable future due to a favourable base effect. Longer term, growth should be supported by low number of cars per capita and ongoing penetration of car credit market relative to developed countries, although we expect volatility to remain high.
Fitch expects AvtoVAZ's operating margin (excluding government grants) to remain negative until at least 2014 on the back of limited growth potential in entry segment both in terms of prices and volumes. However, Fitch believes that AvtoVAZ's profitability will gradually increase as its product mix improves although it should remain weak.
Negative Free Cash Flow
On the back of the current large-scale modernisation programme, Fitch expects AvtoVAZ's capex to remain at 9%-11% of sales over the next couple of years. High capex requirements and no material expected cash inflows from shareholders will result in negative single-digit free cash flow margin and no deleveraging below 4.0x (FFO gross leverage) in the foreseeable future.
Limited Diversification and Industry Risks
The ratings are also limited by low geographical and product diversification. AvtoVAZ's product mix concentrates on ultra-budget/budget 'B' and 'C' segments, and exports a modest 12% of its cars (mostly to CIS countries). In addition, car markets are inherently cyclical and highly volatile, exposing automotive manufacturers to potential liquidity shocks.
Positive: Future developments that could lead to positive rating actions include:
--Acquisition of a controlling stake in the company by Renault and/or Nissan ;
--Sustained improvement in profitability and FCF generation;
Negative: Future developments that could lead to negative rating action include:
--Lower level of direct and/or indirect support from Russian government;
--Sustained deterioration of the company's credit metrics stemming from weakening operating performance.