Russian Grocers X5 And Kopeyka Placed On CreditWatch On X5's Acquisition Of Kopeyka
December 7, 2010 Standard & Poor's
MOSCOW (Standard & Poor's) Dec. 7, 2010-- Standard & Poor's Ratings Services said today that it had placed its 'BB-' long-term corporate credit rating on X5 Retail Group N.V. (X5), owner of Russia's largest grocery retail network, on CreditWatch with negative implications, meaning that we could either lower or affirm the ratings following the completion of our review.
At the same time, we placed our 'B-' long-term corporate credit rating and 'ruBBB' Russia national scale rating on Russian discount food retailer Open Joint Stock Co. Trade House Kopeyka (Kopeyka) on CreditWatch with positive implications, meaning that we could either raise or affirm the ratings following the completion of our review.
"The CreditWatch placement on both companies follows the announcement by X5 that it will acquire a 100% interest in Kopeyka," said Standard & Poor's credit analyst Anton Geyze.
The CreditWatch placement reflects our uncertainty about the potential implications of X5's acquisition of Kopeyka.
If the transaction proceeds, we could affirm or lower the rating on X5, depending on X5's financial policy on liquidity, leverage, capital expenditures, and possible future acquisitions. We believe that the substantial incremental debt that would be added to X5's balance sheet to fund the transaction will weaken key credit metrics below our expectations at the current rating level and might also weaken the combined entity's liquidity position. However, our rating decision will be based on X5's ability to deleverage and on the expected timing of said deleveraging, as well as X5's future liquidity management.
Furthermore, if the transaction proceeds, we could raise or affirm the rating on Kopeyka, depending on our view of the parent-subsidiary link between X5 and Kopeyka.
Applying our corporate criteria (see "RELATED CRITERIA AND RESEARCH" section), we believe economic incentive is the most important factor on which to base our judgment about the degree of linkage between X5 and Kopeyka.
The rating on X5 is constrained by the group's aggressive growth strategy and financial policy, as well as its "less-than-adequate" liquidity and exposure to a volatile emerging market economy and currency, in our view.
These risks are offset by X5's position as Russia's largest grocery retailer, its diversified store formats, demonstrated effectiveness in cost control, and potential support from the owner, Russia-based financial-industrial conglomerate Alfa Group Consortium (not rated).
The ratings on Kopeyka reflect the company's "less-than-adequate" liquidity, high leverage, and structurally weak free operating cash flow, in our view. We also consider that the company has historically displayed limited transparency, although we believe its corporate governance is improving.
"We expect to resolve the CreditWatch placements on both X5 and Kopeyka within the next three months," said Mr. Geyze. "We will meet with X5's and Kopeyka's management teams to evaluate each company's respective financial policy and the potential impact that the combination would have on each company's credit profile if the acquisition goes forward as planned."
Company — TD Kopeyka
Full nameTD Kopeyka
IndustryTrade and retail