December 04, 2012 |
|Fitch Ratings-London-03 December 2012: Fitch Ratings has affirmed Russia-based OJSC Holding Company United Confectioners' (UC) Long-term foreign currency Issuer Default Rating (IDR) at 'B' with a Stable Outlook. Fitch has also affirmed UC's National Long-term Rating at 'BBB+(rus)' with a Stable Outlook.|
The agency has also upgraded the senior unsecured rating applicable to OOO United Confectioners Finance's (UC Finance) bond due April 2013 to 'B' from 'B-'. The upgrade reflects the redemption in May 2012 of one of the group's bonds issued by UC Finance which benefited from a different guarantee package relative to the remaining bond; therefore the existing bond issue is rated at the same level as the IDR, at 'B'. The recovery rating for the bond is 'RR4' due to a soft cap set by Fitch's country-specific treatment of Recovery Ratings.
UC managed to retain or improve its leading position in core market segments in 2011 and 2012. However, with the margin deteriorating in 2011 on higher cost of goods sold and marketing expenses and further negative developments in 2012, Fitch expects the 2012 full-year EBITDA margin to be broadly flat compared to 2011. Fitch expects UC to be able to transfer price increases to consumers in most price segments, due to the strength of its core brands. Profitability is expected to be supported by new product launches in 2013. However, slower price progression in several low-price segments (caramel, bulk candies) and an increase in competition from other participants (such as Roshen) could result in further margin deterioration. An EBIT margin in the high-single digits is commensurate with peers in the packaged food sector, albeit in the low end of expectations.
High capital expenditures in 2011 were mainly debt-funded and led to increase in leverage metrics. However, Fitch still considers UC to have low leverage for the current rating level relative to peers. Debt is expected to be kept flat in absolute terms, with leverage metrics mainly reliant on the trend in profitability. Sales growth is expected at high single digits in 2012-2014, with EBIT margin not exceeding the 2010 level. Fitch therefore expects a slow but healthy deleveraging path for UC, with funds from operations (FFO) adjusted leverage expected to go from 2x-2.5x in 2012 to less than 1.9x in 2015.
Following a successful repayment of its bond in May 2012, UC maintains sufficient liquidity to meet its upcoming bond maturity in April 2013, supported by both a high amount of cash on its balance sheet and available undrawn revolving lines from major Russian banks. The Stable Outlook is also supported by strong free cash flow (FCF). UC remained FCF positive in 2011, despite a considerable increase in capital expenditures and a moderate slowdown in working capital turnover. Fitch expects FCF margin to stay positive and within a range of 2.5%-4.5% of sales in 2012-13 (FY11: 1.9%).
Corporate governance issues remain a key credit concern for Fitch, in particular increasing loans to related parties that exceed inter-group borrowings. This net creditor position is treated by Fitch as shareholder-friendly, potentially adversely affecting unsecured creditors (in case such loans to related-parties exceed FCF consistently). In addition, UC maintains a significant portion of its cash in Guta-Bank (unrated). Fitch also notes that the shareholders control the board (which does not have any independent directors) thereby translating into a potential misalignment of interests between shareholders and debt holders. Greater transparency and disclosure on the rest of the group activities and intra-group transactions would help alleviate governance concerns. Currently these factors override the strength in UC's financial metrics translating into one-notch discount from its standalone rating at 'B+' level.
RATING SENSITIVITY GUIDANCE:
Negative: Future developments that could lead to negative rating actions include:
- Material deterioration in FCF generation or any major debt-funded acquisition
- Sustained FFO adjusted leverage above 3.0x or FFO adjusted leverage above 2.5x if the share of foreign-currency debt reaches 50%
- Net increase in related-party investments plus a net decrease in related party borrowings altogether exceeding cash flow from operations minus maintenance capex.
Positive: Future developments that could lead to positive rating actions include:
Subject to evidence of a standalone business model with reduced inter-relationship with Guta Group, future developments that may, individually or collectively, lead to a positive rating action include: .
- Sustained FFO adjusted leverage below 1.7x for at least two consecutive years
- Maintenance of positive FCF above RUB1bn annually.
- Liquidity score of more than 1.5x (cash, available committed lines and FCF for the next year divided by the amount of short-term debt commitments).
Company: United Confectioners Holding
|Full company name||OJSC United Confectioners Holding Company|
|Country of risk||Russia|
|Country of registration||Russia|