Moody's assigns B3 CFR to Ritzio International Limited
July 2, 2007
London, 29 June 2007 -- Moody's Investors Service today assigned a B3
corporate family rating to Ritzio International Limited ("Ritzio
International" or "the company"), an international gaming company and a
100%-owned subsidiary of Ritzio Entertainment Group (B2/A3.ru, on review for
downgrade), a leading Russian gaming operator. At the same time Moody's
assigned a provisional (P)B3 rating to the proposed US$250 million Loan
Participation Notes (the "Notes") due 2012 to be issued by the Royal Bank of
Scotland for the purpose of funding a loan in favour of Ritzio International
for further on-lending or investing into its international subsidiaries. The
outlook on the ratings is stable.
Moody's issues provisional ratings in advance of the final sale of
securities, and these ratings only represent Moody's preliminary opinion.
Upon a conclusive review of the transaction and associated documentation,
Moody's will endeavour to assign a definitive rating to the securities. A
definitive rating may differ from a provisional rating.
In the context of the implementation of the Loss Given Default methodology
for EMEA issuers effective from 19 March 2007, Moody's has applied a 50%
Loss Given Default (LGD) ratio to the company based on the rating agency's
emerging market guidelines, and assigned a Probability of Default Rating
(PDR) at the B3 level, the same as the corporate family rating.
Concurrently, Moody's assigned LGD4 (53%) ratio to the Notes.
For the purposes of the rating, Moody's views Ritzio International as a
ring-fenced business within the larger Ritzio Entertainment Group. The B3
corporate family rating reflects the following challenging elements: (i) the
company's relatively short track record of focused development on
international operations; (ii) the aggressive expansion strategy, targeting
a fourfold increase in the number of slot machines by 2009, associated with
a significant investment in new gaming networks and integration risk from
newly acquired businesses; (iii) the immature and uncertain regulatory
environment in the jurisdictions of Ritzio International's operations; (iv)
a significant share of early start-up operations in the company's
prospective portfolio; (v) negative free cash flows, expected to turn
positive after 24 months, (vi) the sizeable expected increase in leverage in
2007; (vii) the large and increasing lease obligations correlating to the
growing business volume; (viii) the potential threat of the common
shareholders exerting pressure on the cash flows from the international
operations, including in the form of large dividend distributions, following
potential distress of the Russian business closer to 1 July 2009, should the
provisions of the gaming legislation enacted in Russia in December 2006 come
into force in their current form; (ix) a certain volume of related-party
transactions in the company's business, and finally (x) the private
ownership of the company, which limits its access to the capital markets.
More positively, the ratings also acknowledge the geographical
diversification of the company's business, the typically short payback
period of the new operations, allowing accelerated turnover of borrowed
funds, and the robust and predictable cash flows.
Ritzio international's profitability and return on assets performance
indicates a "Ba" rating, while other factors -- such as the small scale
of operations by international standards, limited track record of
developing business in new geographically remote jurisdictions, high
dependence on rented premises due to an insignificant number of wholly
owned properties, substantial required development capital expenditure,
and high expected leverage following the proposed issue of the US$250
million notes bring the rating into the lower "B" category.
The ratings also take into consideration the following positive elements:
(i) the significant growth potential of the gaming markets in the
company's jurisdictions, (ii) the company's track record of creating a
stable business with a recognisable brand in a number of its
long-established non-Russian markets, such as Ukraine and the Baltics,
which currently contribute approximately 90% of the company's EBITDA;
(iii) the experienced management and financial expertise of the parent
company Ritzio Entertainment Group; and (iv) committed shareholder
contributions in the form of subordinated loans of up to US$120 million
in 2007. Moody's expects the company's Debt/EBITDA (adjusted for
operating leases) to increase substantially to 8.6x in 2007 following the
issue of the Notes, with a subsequent gradual decrease to approximately
5.0x over the next 36 months as a result of the de-leveraging policy.
The company will rely on external bank financing (including shareholder
loans) over the next two years in order to expand its operations,
through both acquisitions of local players and organic growth depending
on the licensing regimes. The company's consolidated cash and cash
equivalents position was US$14.0 million as of 31 December 2006.
Ritzio International contemplates issuing US$250 million Loan
Participation Notes for a term of five years. The transaction is part of
a US$5 billion Royal Bank of Scotland ("RBS") Structured Notes programme.
The underlying loan will be issued by RBS in favour of Ritzio
International, followed by the issue of Notes for the sole purpose of
funding the advance. Proceeds from the loan will be utilised (via an
inter-company loan or equity investments to the subsidiaries) for general
corporate purposes, including acquisitions.
The (P)B3 rating reflects the low and decreasing share of secured bank
debt at the subsidiaries' level (US$22.8 million as of end-2006, or 10%
of total capital) in the company's capital structure. The majority of
debt will be represented by the Notes, guaranteed by the major operating
subsidiaries contributing 80% of EBITDA to the consolidated Ritzio
International Group, and subordinated shareholder financing. Moody's
notes that the incurrence of substantial secured debt in a senior
position to the senior unsecured debt may potentially result in the
downward notching of the Notes.
The Notes will be subject to various covenants, including limitations on
additional indebtedness (with a 4.0x Consolidated Net Debt (excluding
shareholder loans)/Consolidated EBITDA maintenance test), coverage
(EBITDA/gross interest expense above 2.5x), creation of new liens and
related party transactions. Moody's notes that the dividend distributions
to the parent are permitted if Consolidated Net Debt to EBITDA falls
below 2.5x and are limited to 50% of net profits. Shareholder loans are
required to have at least 30 days longer maturity than the Notes, and may
be prepaid only if the dividend covenant is satisfied. Noteholders also
benefit from Change of Control and Cross Default clauses.
On June 27, 2007 Moody's placed the parent company of Ritzio
International, Ritzio Entertainment Group, on review for possible
downgrade as a result of uncertainty over the impact of recent
developments concerning gaming legislation on its Russian operations.
Moody's does not, however, believe at this time that the possible
contraction of the parent's activities in Russia will impact the credit
profile of Ritzio International as assessed on a stand-alone basis in the
context of the assigned B3 corporate family rating.
The stable outlook on the rating relies on Moody's expectation that
Ritzio International will be able to maintain the overall profitability
of its business while rolling out operations in the new jurisdictions.
The rating agency expects the intensive debt-financed investment over
the next two to three years to be underpinned by the relatively short
payback period characteristic of the industry and predictability of cash
flow generation. The ratings are also supported by Moody's view of the
legislation development trend in the company's countries of operations as
Moody's cautions, nevertheless, that Ritzio Entertainment Group faces an
uncertain future in light of the recent legislative developments in
Russia. As such, Moody's will monitor the effectiveness of the legal
ring-fencing of the issuing entity, in particular with regard to
potential dividend distributions to the parent company. Moody's rating
for Ritzio International does not factor in any parent company support,
but could conversely be negatively impacted if developments at the parent
company were to impact the creditworthiness of Ritzio International
Company — Ritzio International
Full nameRitzio International Limited