Research Update: Russia-Based HMS Hydraulic Machines & Systems Group Assigned 'BB-' Corporate Credit Rating; Outlook Stable.

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1 June 16, 2011 Research Update: Russia-Based HMS Hydraulic Machines & Systems Group Assigned 'BB-' Corporate Credit Primary Credit Analyst: Antoine Cornu, Paris (33) Secondary Contact: Abigail Klimovich, London (44) Table Of Contents Overview Rating Action Rationale Outlook Related Criteria And Research Ratings List 1

2 Research Update: Russia-Based HMS Hydraulic Machines & Systems Group Assigned 'BB-' Corporate Credit Overview HMS is a Russia-based pumps manufacturer, which is also involved in providing engineering, procurement, and construction services. We consider its business risk profile to be "weak" and the financial risk profile to be "significant." We are assigning our 'BB-' long-term corporate credit rating to HMS. The outlook is stable as we expect HMS to continue benefitting from strong market demand in Russia, renewing its order backlog, and maintaining its embedded margin. Rating Action On June 16, 2011, Standard & Poor's Ratings Services assigned its 'BB-' long-term corporate credit rating to HMS Hydraulic Machines & Systems Group PLC (HMS), a Russia-based manufacturer of pumps and oil and gas equipment. At the same time, we assigned our 'ruaa-' Russia national scale rating to HMS. The outlook is stable. Rationale The rating on HMS reflects our assessment of its weak business risk profile and significant financial risk profile. The ratings are primarily constrained by HMS' narrow geographical diversification and the risk inherent in doing business in Russia, which represents around 90% of the group's revenues. Ratings are also constrained by the execution risks HMS faces on the delivery of contracts. The contracts are on a lump sum basis, which leaves HMS exposed to potential unexpected cost overruns. This risk is reinforced by HMS' concentration on some large contracts such as the ESPO contract with Transneft which represented close to half of HMS' backlog of orders on Dec. 31, 2010, and which contributes substantially to group operating margin. Supporting factors include HMS' leading position in the Russian pumps markets. We expect HMS to be able to protect its market shares going forward and fully take advantage of the positive prospects for the Russian pumps industry, fuelled by the need for replacement and expansion of infrastructure in Russia. Another key supportive factor is HMS' very solid balance sheet following the IPO and the subsequent repayment of around 70% of debt in February Standard & Poor s RatingsDirect on the Global Credit Portal June 16,

3 Research Update: Russia-Based HMS Hydraulic Machines & Systems Group Assigned 'BB-' Corporate Credit Liquidity We consider HMS liquidity position to be "adequate". As of March 31, 2011, HMS' short-term debt of Russian ruble (RUB)0.2 billion was covered by RUB351 million cash on balance sheet and about RUB3.1 billion funds available under its credit lines--about RUB1.1 billion of which needed to be refinanced within the next 12 months. One of HMS' financial guidelines is to maintain at least two-thirds of its debt as long term. Accordingly, on March 31, 2011, 94% of the drawn debt was long term. A portion of the group's current liquidity is associated with clients' advances on certain projects. We expect that HMS will maintain working capital pre-financing from customers' advances as part of its ongoing operations. Relevant aspects of the group's liquidity profile, based on our criteria, are as follows: We expect HMS' sources of liquidity over the next months to significantly exceed its uses. We expect that net sources would still be slightly positive in the case of a 50% shortfall in 2011 EBITDA compared with our forecasts. All of HMS' bilateral bank lines are subject to financial covenants, which are tested on a quarterly basis at the consolidated group level. As of March 31, 2011, the group was in compliance and we expect HMS to maintain ample headroom under financial covenants. We consider that HMS would likely be able to absorb shocks, such as an operational issue on one large contract leading to material cost overruns/payment delays. HMS appears to have solid relationships with its banking pool. Following its IPO, the group could also raise additional funds on the equity market if needed. Outlook The stable outlook reflects our view that HMS will continue to benefit from the currently healthy market fundamentals and will be able to improve its EBITDA margins due to a more favorable product mix in the future. We also expect the group to tackle its order backlog successfully. At the current rating level, we think HMS has headroom for growth via small debt-financed acquisitions, but we expect management to maintain the ratio of debt to EBITDA comfortably below 2.0x at all times. We will also keep monitoring the success of HMS' penetration in replacement, maintenance, and services markets and its proportion of future earnings from these markets. Negative rating actions could result from material operational issues in the execution of a contract, leading to lower margins than presently assumed or large payment delays. Larger debt-financed acquisitions than we currently expect, resulting in a more leveraged balance sheet could also trigger a downgrade. 3

4 Research Update: Russia-Based HMS Hydraulic Machines & Systems Group Assigned 'BB-' Corporate Credit While unlikely at this stage, we could raise the ratings if HMS developed a stronger-than-anticipated performance over time, and exhibited a longer track record of relatively stable and profitable operations, as well as strict compliance with its financial policy. Related Criteria And Research All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated. Methodology And Assumptions: Standard & Poor's Standardizes Liquidity Descriptors For Global Corporate Issuers, July 2, 2010 Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, Corporate Criteria: Ratios And Adjustments, April 15, Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List New Rating; CreditWatch/Outlook Action HMS Hydraulic Machines & Systems Group PLC Corporate Credit Rating BB-/Stable/-- Russia National Scale Rating ruaa-/--/-- Additional Contact: Industrial Ratings Europe;CorporateFinanceEurope@standardandpoors.com Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at All ratings affected by this rating action can be found on Standard & Poor's public Web site at Use the Ratings search box located in the left column. Alternatively, call one of the following Standard & Poor's numbers: Client Support Europe (44) ; London Press Office (44) ; Paris (33) ; Frankfurt (49) ; Stockholm (46) ; or Moscow 7 (495) Standard & Poor s RatingsDirect on the Global Credit Portal June 16,

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