OREANDA-NEWS. Fitch Ratings has assigned Russia-based Baltic Leasing LLC's series BO-01 RUB3bn fixed-rate rouble-denominated bonds a Long-term local currency rating of 'B+' and a National Long-term rating of 'A-(rus)'. The bond's Recovery Rating is 'RR4'. The issue benefits from recourse to Baltic Leasing LLC's parent, Baltic Leasing OJSC (B+/A-(rus)/Negative).

The bonds have a tenor of six years with a put option in two years. The coupon for the first two years has been set at 15.1%. Proceeds from the issuance were used solely for refinancing part of the issuer's borrowings from Otkrytie Group. Should Baltic Leasing LLC fail to make an interest or principal payment under the terms of the bond, bondholders will benefit from a public irrevocable offer (PIO), allowing them to sell the bonds to the issuer's parent, Baltic Leasing OJSC.

KEY RATING DRIVERS
The bond's rating is equalised with Baltic Leasing OJSC's Issuer Default Rating (IDR), reflecting Fitch's view that default risk on the bond and on the parent's senior unsecured obligations is very closely aligned. Baltic Leasing LLC comprises a large majority of the consolidated assets and business of Baltic Leasing OJSC, and in Fitch's view it is unlikely that one entity could default while the other serviced its obligations.

Fitch believes it could be challenging for bondholders to enforce the PIO in a Russian court, in case of need. However, recourse to the parent entity provides little additional credit enhancement for creditors, given that the former's credit profile is highly linked to that of its subsidiary.

At end-9M14, 61% of Baltic Leasing Group's funding was raised from Otkrytie-related banks, 27% of which (17% of total funding) was redeemed using proceeds from the bond issuance. According to management, the issue was fully acquired by banks related to the Otkrytie Group.

The issuance has slightly improved Baltic Leasing LLC's funding profile, and accordingly of Baltic Leasing OJSC, as the average maturity of the funding base was extended somewhat. Moreover, the replacement of bank loans with the bond has allowed Baltic Leasing OJSC to unencumber some of its lease book, which had been pledged against the loans. However, Baltic Leasing's margins could be negatively impacted by increased borrowing costs, as the bond coupon rate is 3ppts higher than the bank funding that it replaced.

RATING SENSITIVITIES
The rating could be downgraded if Baltic Leasing OJSC's Long-term IDR was downgraded, or if there was a marked increase in the proportion of pledged assets, potentially resulting in lower recoveries for senior unsecured creditors in a default scenario. An upgrade of the bond would require an upgrade of Baltic Leasing OJSC.