Ambitious VKM Leasing is rapidly growing its portfolio. However,
it is highly leveraged and vulnerable to liquidity risk
VKM Leasing is the fifth-largest rolling-stock leasing
company in Russia, with a five per cent market share. It is
majority-owned by the Mordovia-based VKM (The Mordovia Railroad
Car-Building Company) group, which has interests in manufacturing
of passenger cars, steel production and finance.
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Mordovia is a federal subject of the Russian Federation and a
republic located in the south-east of central Russia.
The ownership structure of VKM Leasing is broken down to 75 per
cent plus one share controlled by the VKM group and 25 per cent
minus one share held by Interconsultleasing group.
The government of Mordovia holds a golden share in VKM group,
providing financing and guaranteeing mutual projects.
The VKM group owns one of three plants in Russia that produce
coaches and a third of its sales are financed by VKM Leasing. VKM
is also reported to have 25 per cent of the share of Russia’s
rolling stock.
Reporting in accordance with IFRS,VKM Leasing had total
assets of RUB3.1bn (about €84m) and equity of RUB76.7m (about
€2.1m) as at 31 Dec 2006. It reported an operating profit of
RUB75.5m (about €2m) and net profit of RUB57.4m (about €1.6m) in
the same period. Fitch Ratings has noted some instability in VKM
Leasing’s management, which raised concerns over the company’s
governance.
VKM Leasing’s portfolio is growing rapidly with the development
of rail infrastructure in Russia. In 2006, net investments in
leases more than doubled to RUB2.2bn (about €60m). In an aggressive
move to compete for greater market share, VKM Leasing reduced the
advance rate required from its customers from 26.5 per cent of the
equipment cost in 2004 to 11.1 per cent in 2006. Lower advance
rates are accompanied by longer lease terms.
Although its lease portfolio has grown and become more
diversified, concentration risk was still high. The top 10
customers made up 76 per cent of its portfolio, with the largest
exposure to Gazvagonpark (19 per cent), Regionvagonpark (14 per
cent) and Tverskoi Express. Interestingly, all three are members of
the VKM Group.
Thus far, asset quality has not been a problem – and while the
economy remains buoyant and the transport sector active, the risks
of default seem limited. However, Fitch notes the company has not
operated through hard times, so its ability to manage credit risk
has not been tested. Notably, VKM Leasing was incredibly highly
leveraged (3,673 per cent as at end September 2007), which severely
undermines its ability to absorb losses.
Balance-sheet analysis shows some vulnerability in VKM Leasing’s
liquidity profile. It has historically maintained a very low level
of liquid assets, Fitch notes. As at end September 2007, VKM
Leasing’s cash balances fell to RUB10.5m (about €284,000) or 0.3
per cent of total assets it also reported RUB41.6m (about €1.1m) of
short-term investments in shares and short-term loans.
“VKM Leasing is extremely vulnerable to liquidity risk that can
be triggered by a default of a counterparty, closure of a bank
credit line used for financing long-term leases or worsening
economic conditions,” Fitch opines.
Still, the management appears to be addressing that issue. In
March, VKM Leasing’s advisers,
RIGroup-Finance, announced the leasing company planned to borrow
RUB5bn (about €149m) from five Russian banks. RIGroup,
Russia’s largest bank, Sberbank. VTB Bank, Klientsky Bank,
Millennium Bank and Bank Sprut were ready to provide credit lines
to the company this year. VKM Leasing was also in discussions with
Absolut Bank (part of Belgium’s KBC group), the Moscow Bank for
Reconstruction and Development and SDM Bank for additional credit
lines, according to news reports.
To date, Sberbank has been its principle funder, providing 92
per cent of VKM Leasing’s funds.
Apart from banks, it has plans to tap the debt markets through a
bond issue that has been held over since July last year because of
weak market conditions. The company has revived that plan, aiming
to place a RUB1bn (about €27m) bond in April. Earlier last year, it
had cancelled a $50m (about €32m) credit-linked note issue. With
markets in a moribund state, funding will continue to be a
challenge for the company.
