Fitch Downgrades JSC Sistema-Hals to ‘CCC’; Remains on Watch Negative
October 28, 2009 Fitch Ratings
Fitch Ratings-London/Moscow-27 October 2009: Fitch Ratings has today downgraded Russian property developer JSC Sistema-Hals’ (SH) Long-term Issuer Default Rating (IDR) to ‘CCC’ from ‘B-’. Fitch has simultaneously downgraded SH’s Short-term IDR to ‘C’ from ‘B’ and removed the Rating Watch Negative (RWN). The National Long-term rating is downgraded to ‘B-(rus)’ from ‘BB-(rus)’. The Long-term IDR and National Long-term rating remain on RWN.
The rating action reflects a recently obtained clarification on parental support for SH from its major shareholders, Bank VTB JSC (VTB, rated ‘BBB’/Negative) and Sistema Joint Stock Financial Corp. (Sistema, rated ‘BB-’/Stable), and the company’s ongoing weak underlying trading profile. SH’s ratings now benefit from a two notch uplift over the company’s standalone risk profile due to expected parental support from VTB. Fitch had previously downgraded SH’s Long-term IDR on 16 October to ‘B-’ from ‘B’ and placed the rating on RWN due to the company’s weakened underlying trading profile and because of uncertainty over the level of support which may be forthcoming from SH's main shareholders.
The rating remains on RWN to reflect Fitch’s view that a coercive debt exchange (CDE), for example the occurrence of a debt-for-equity swap or the repayment of creditors at less than par, remains a real possibility for some time due to SH’s currently unsustainable level of debt. The occurrence of a CDE would likely result in a downgrade of SH’s rating to Restricted Default (RD).
Due to a lack of cash resources, SH was unable to meet a scheduled coupon payment of RUR200m (USD7m) on 13 October 2009 on its RUR3bn (USD100m) Series 1 rouble bond, maturing 2014, and entered into a grace period. However, Fitch understands that the coupon payment has since been made. SH also recently confirmed that it had entered into a grace period until February 2010 in relation to interest payments under its USD775m (equivalent) of debt to VTB. Both events demonstrate SH’s current inability to cover its financial obligations with its own internal resources. Even if SH is somehow able to fund its ongoing external debt obligations, the company will still require a material amount of new funding to build-out and maximise the value of its existing real estate projects. Fitch is of the opinion that attracting such funding will remain a significant challenge.
SH’s financial difficulties stem from its excessive leverage and the rapid downturn in the Moscow real estate market. The deterioration in SH’s standalone profile is indicated by weak reported H109 results, with LTM revenues down 61% yoy and LTM EBITDA down 88%. As a result, SH’s credit metrics have weakened materially, with net debt/LTM EBITDA standing at 71.7x (6.6x at H108) and LTM EBITDA interest cover at 0.2x (3.2x).
As announced in April 2009, VTB may become the majority shareholder of SH should it exercise a call option to increase its shareholding to 51% from a current 19.5%. VTB has previously indicated that it intends to exercise this call option and has until April 2010 to do so. SH’s ratings could be upgraded if VTB and/or Sistema commit to providing substantial support to SH, such as a full debt restructuring, including legal guarantees on SH’s debt, or if SH’s standalone credit profile improves.
However, the ratings could be downgraded if SH experiences another payment default and tangible financial support is not forthcoming from main shareholders within the applicable grace period (to the extent SH cannot fund this itself). SH’s ratings could also be downgraded to ‘RD’ if the company initiates a debt restructuring that qualifies as a CDE, or repays creditors at less than par.
For further information, please see the March 2009 criteria report, entitled ‘Coercive Debt Exchange Criteria’, which is available on the agency’s public website, www.fitchratings.com.
Company — Hals-Development
Full namePJSC Hals-Development
IndustryConstruction and development