Fitch Downgrades Sistema-Hals to 'RD' on Coercive Debt Exchange; Upgrades to 'CCC'
December 9, 2009 Fitch Ratings
Fitch Ratings-London/Moscow-09 December 2009: Fitch Ratings has today downgraded Russia based property developer JSC Sistema-Hals' (SH) Long-term Issuer Default Rating (IDR) to 'RD' (Restricted Default) from 'CCC' and removed it from Rating Watch Negative (RWN), following the redemption of promissory notes with a face value of USD119.3m (owed to related party AFK Sistema JSC (Sistema)) for a total of USD493.
Immediately thereafter, Fitch has upgraded the Long-term IDR to 'CCC' from 'RD', reflecting the underlying credit risk of SH after the redemption of the promissory notes but placed it on RWN.
The redemption of the promissory notes met Fitch's two requirements for classification as a coercive debt exchange (CDE), namely that it constitutes a loss for investors, by virtue of the redemption being made at a discount of 99.99% to face value and it was de facto coercive, in that SH needs a recapitalisation if it is to avoid a payment default. As such, Fitch considers this repayment of promissory notes a CDE and this drives the downgrade of the IDR to 'RD'. Fitch now regards SH debt originated from Sistema as deeply subordinated. Should a further repayment of this debt be made at less than par, the agency will not comment again on this specific matter. The IDR is placed on RWN to reflect the real possibility of the occurrence of another CDE (possibly including non-shareholder originated debt).
SH continues to exhibit weak underlying trading, with 9M09 revenue down 80% y-o-y, negative operating EBITDAR and USD1.35bn of gross debt. The 'CCC' IDR continues to benefit from a two-notch uplift over SH's standalone credit profile due to expected support from shareholder Bank VTB JSC (VTB, 'BBB'/Negative Outlook). On 3 December 2009 SH announced that VTB had increased its shareholding in SH to 51.24% from 19.74% as a result of exercising an option. Fitch had been expecting this action.
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 explicit and legally enforceable guarantees on SH's debt, or if SH's standalone credit profile improves. However, the ratings could be downgraded if SH experiences a payment default and tangible financial support is not forthcoming from main shareholders within the applicable grace period. SH's ratings could also be downgraded to 'RD' if the company initiates a debt restructuring that qualifies as a CDE, or repays non-Sistema creditors at less than par.
A full list of rating actions is detailed below:
Long-term IDR downgraded to 'RD' from 'CCC'; off RWN and thereafter upgraded to 'CCC'; placed on RWN
Short-term IDR is affirmed at 'C'
National Long-term rating downgraded to 'RD(rus)' from 'B-(rus)'; off RWN and thereafter upgraded to 'B-(rus)'; placed on RWN
For further information, please see the March 2009 criteria report, entitled 'Coercive Debt Exchange Criteria', which is available on the agency's website, www.fitchratings.com.
Company — Hals-Development
Full namePJSC Hals-Development
IndustryConstruction and development