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S&P: Russian Personal-Care Products Producer Concern Kalina (JSC) Cut To 'ruBBB+' On Aggressive Liquidity Management

April 22, 2009 "Standard & Poor's"
MOSCOW (Standard & Poor's) April 22, 2009, Standard & Poor's Ratings Services said that it had lowered its Russia national scale rating on Russia's largest cosmetics and personal-care products producer Concern Kalina (JSC) to 'ruBBB+' from 'ruA+'.

"The downgrade reflects our concerns about Kalina's aggressive liquidity management, increasing debt leverage amid weakening macroeconomic conditions, and its exposure to interest rate and foreign currency risks," said Standard & Poor's credit analyst Anton Geyze.

The company's weak liquidity position stems from its predominantly short-term debt maturity profile, without sufficient committed backup liquidity sources covering short-term maturities, as well as dependence on the bank's willingness to amend or waive its covenants on long-term loans.

Kalina anticipates breaches on a number of its covenants that are tested annually after its annual financials are published. The company recently obtained approval from a bank to waive the covenants for 2008. As the covenants under consideration depend on a number of factors largely outside the company's control, such as accounting treatment and foreign exchange developments, we view the risk of repetitive breaches as serious.

According to the company's preliminary annual financials, reported short-term debt equaled Russian ruble (RUR) 3.2 billion ($109 million) against cash of RUR294 million and RUR28 million of free operating cash flow in 2008. The company maintained undrawn available committed lines of RUR1.6 billion at 2008 year-end.

Modest leverage used to be one of the key mitigants for Kalina's challenging liquidity position, but in the future, we do not expect Kalina's free cash flow generation capacity to be sufficient to demonstrate meaningful deleveraging or be sufficient to help solve its liquidity issues. According to Kalina's preliminary annual financials for 2008, Kalina's adjusted debt-to-EBITDA ratio deteriorated to 2.7x from 2.3x at year-end 2007, due to dividend payouts and share buybacks that were not offset by marginal EBITDA growth.

We are also concerned about Kalina's increased financing costs and ruble foreign exchange rate depreciation, because 40% of the company's costs are denominated in foreign currencies, while the short-term nature of the company's debt implies a sharp interest rate increase on its ruble denominated debt.

"Downward rating pressure will develop if leverage exceeds 3x of adjusted debt to EBITDA," said Mr. Geyze.

We will closely monitor the concrete results of Kalina's efforts to improve its liquidity position, in particular, debt maturity profile extension and covenant compliance and hedging foreign currency risks. We expect the company will aim to route all its operating cash flows to debt reduction, carefully manage its working capital, reduce capital expenditures to the maintenance level, and refrain from dividend payout and share buybacks in 2009.

In our view, the evolution of the rating is strongly dependent on the progress of Kalina's current negotiations with potential providers of longer-term finance. In that respect we will continuously review the status of these discussions, and likely implement positive rating changes as soon as Kalina can confirm the availability of longer-term finance.
Company — Kalina
  • Full name
    open joint stock company Kalina
  • Registration country
  • Industry
    Chemical and petrochemical industry