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S&P: OJSC RBC Information Systems Cut To 'B', On Watch Neg On Liquidity And Refinancing Concerns

October 14, 2008
LONDON (Standard & Poor's) Oct. 13, 2008--Standard & Poor's Ratings Services lowered its long-term corporate credit rating on Russian media group OJSC RBC Information Systems to 'B' from 'B+'. At the same time, the Russia national scale rating and the senior unsecured bond ratings were lowered to 'ruBBB+' from 'ruA+'. The 'B' short-term corporate credit rating was affirmed. In addition, the ratings were placed on CreditWatch with negative implications.

"The rating actions on RBC reflect a combination of heightened risks to the group's liquidity position in view of rapidly deteriorating global and Russian credit market conditions arising from: the group's reliance on short-term debt funding to finance its business expansion; its partial reliance on financial investments, mostly stock market securities, to bridge its funding needs during 2009; the slow pace of progress in its refinancing efforts; and some recent pressures in certain parts of the Russian advertising markets," said Standard & Poor's credit analyst Raam Ratnam.

Until the second quarter of 2008, RBC's cash and short-term investments of $232 million exceeded its short-term debt of $158 million. In the third quarter of 2008, we believe that investments would constitute more than 50% of RBC's short-term resources, as the cash balance itself would have declined due to debt repayment and payment for acquisitions and capital expenditure. Given the recent sharp fall in equity prices in Russia and poor stock exchange trading conditions, we estimate the financial investment part of RBC's liquidity to have considerably eroded, which implies that, together with available cash balances, the company no longer has sufficient liquid assets to cover debt obligations through the end of 2009. The group's capacity to meet its debt obligations is therefore dependant upon the rollover of debt maturities or issuance of new debt, which is obviously challenging in the current credit environment.

In addition to the liquidity and refinancing risks, the CreditWatch placement reflects our concerns regarding the unavailability of audited financial statements for 2007, and consequently, RBC not fulfilling its reporting commitments to its lenders. Furthermore, we expect that the current economic conditions and market pressures in Russia to result in RBC's inability to sustain its strong operating performance of the first half in the second half of the year.

RBC's credit profile benefits from its solidifying market position, continuing scale expansion, and improving revenue diversification. RBC reported a strong performance in the first half of 2008: Revenues rose to $109 million, a 42% increase year on year, and the consolidated EBITDA margin increased to 30%-32%. The diversity of its client base of 5,500 should partially mitigate RBC's exposure to the cyclical advertising market in Russia, which despite some recent downward pressures, is still growing at a fast pace.

Standard & Poor's will continue to closely monitor the situation. We expect to resolve the CreditWatch placement over the next few weeks by assessing RBC's plans to: refinance its 2009 debt maturities, put in place suitable financing to cover debt obligations at least until year-end 2009, rapidly monetize its financial investments, and reduce its cost base while continuing to increase its share of the Russian media market.

Upon resolution of the CreditWatch placement, the ratings could be either lowered or affirmed. A further downgrade by one to three notches is possible if RBC is unable to rapidly address its weak liquidity and near-term refinancing needs. A negative rating action is also likely if the group is unable to publish its 2007 audited financial statements under International Financial Reporting Standards without any material qualifications within the next one month or if it reports EBITDA margins of less than 15% for the year ending 2008.

However, the ratings could be affirmed if RBC is able to rapidly secure its 2008 and 2009 debt obligations through adequate refinancing and demonstrate its ability to prudently manage its liquidity and financial reporting process, as long as the current delay with respect to publication of the 2007 audited financial statements is limited in scope and nature.
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