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S&P Affirms Caustic And Plastcard 'CCC+/ruBB' Rtgs; Otlk Stbl

August 10, 2006
Standard & Poor's Ratings Services said today it affirmed its 'CCC+' corporate credit rating and 'ruBB' Russia national scale rating on OAO Caustic and OAO Plastcard, the two core operating companies of Russia-based chemicals group Nikos. The outlooks on both entities remain stable.
At the same time, Standard & Poor's assigned its 'ruBB' senior unsecured debt rating to the proposed Russian ruble (RUR) 1.5 billion issue by Nikoshim-Invest LLC, a special financial vehicle of Nikos. The proposed bond matures in three years (with a one-year put option) and is jointly and severally guaranteed by Caustic, Plastcard, and group trading vehicle OOO Vnesheconomtorg (VET)--all of which are under the common control of Nikos.
Plastcard and Caustic are the core operating arms that produce polyvinyl chloride (PVC) and caustic soda, respectively. The companies are located at the same production site and are closely linked technologically.
"The key factors that constrain the ratings on Caustic and Plastcard at the 'CCC+' level are Nikos' complex and evolving structure, limited transparency, and exposure to refinancing risks," said Standard & Poor's credit analyst Elena Anankina. "The group is not consolidated but is united through common shareholding and discretionary intra-group cash flows. This implies corporate governance risks, obscures transparency, and limits access to long-term financing."
Although in July 2006, a newly created entity, OOO Gruppa Nikos, took hold of 85% stakes in Caustic and Plastcard (which we believe to be an important step forward in streamlining the group structure), a significant portion of cash flows and profits and certain assets remain outside of the group, and their consolidation would require some time.
These constraints, however, are somewhat tempered by the fact that the group's short-term maturities are covered by short-term bank lines. In addition the group maintains a strong position as the third-largest player in Russia's growing PVC market.
The stable outlook assumes that Nikos will be able to refinance its existing short-term debt and succeed in arranging additional credit lines to support its liquidity in 2006 and 2007. If the new RUR1.5 billion bond placement is successful, that would benefit the group's liquidity. Standard & Poor's will specifically focus on the group's liquidity arrangements for the first Russian ruble bond issue that matures in December 2006.
Although the group demonstrated a significant improvement in profitability and cash flow in 2004 and 2005, which could potentially support a higher rating, and although its core production subsidiaries have been consolidated in 2006, upgrade potential is constrained until Nikos achieves significant progress in consolidating the group's cash flows, achieving better transparency (with consolidated audited accounts), and optimizing its debt maturity profile. Standard & Poor's believes this will take some time. A downside scenario for the rating is liquidity disruption.
Issue — Caustic, 01
  • Status
  • Country of risk
  • Redemption (put/call option)
    *** (***)
  • Amount
    300,000,000 RUB
  • М/S&P/F
    — / — / —