MOSCOW (Standard & Poor's) April 28, 2011--Standard & Poor's Ratings Services said today that it had raised its Russia national scale rating on Russian cosmetics producer and distributor Concern Kalina (JSC) to 'ruA+' from 'ruA-'.
The upgrade reflects an improvement in Kalina's liquidity position, which we now assess as "less than adequate" (up from "weak"). The company's liquidity sources now exceed liquidity uses and headroom under its covenants is adequate. We consequently have also revised our financial risk profile assessment to "aggressive" from "highly leveraged".
Standard & Poor's national scale credit ratings provide a current opinion of an issuer's creditworthiness or overall capacity to meet specific financial obligations relative to that of other entities and specific obligations in a given country.
By year-end 2010, Kalina had decreased the share of short-term debt in total debt to 35% from 50% at year-end 2009, and more than 85% historically. Most of Kalina's debt now matures within the next three years, with smaller maturities stretching to the fourth and fifth year.
Kalina's capital structure is represented by three amortizing lines from large foreign banks and one five-year line from the European Bank for Reconstruction and Development (AAA/Stable/A-1+).
Kalina is not exposed to foreign exchange risk on the debt side, as all of the company's debt is now denominated in Russian rubles (RUB). Moreover, thanks to refinancing, Kalina no longer depends on banks' decisions regarding rolling over its short-term debt because it is covered by accumulated on-balance-sheet cash, sustainable free cash flow generation, some long-term committed lines, and potential asset disposal proceeds.
We believe that Kalina's management is likely to continue with this more conservative approach to liquidity management in the future, which should help bring the ratio of estimated liquidity sources to uses to more than 1.2x over the short term. We also believe that the company will continue to generate substantial positive free cash flow and maintain a ratio of adjusted debt to EBITDA of less than 3.0x.
We view Kalina's financial risk profile as "aggressive", based on its "less-than-adequate" liquidity. In particular, we view the group's exposure to interest rate risks as a material risk, owing to its reliance on ruble-denominated floated-rate debt.
These risks are somewhat mitigated by the company's modest debt leverage, with adjusted debt to EBITDA of 2.1x in 2010 and continuingly positive free cash flow generation. Kalina generated positive free operating cash flow for the third year in a row in 2010 and for the second year in a row its discretionary cash flow after dividends was also positive at RUB343 million ($11 million). The interest coverage ratio improved to 4.9x in 2010 from 2.6x in 2009, because the company's cost of capital fell thanks to increasingly benign credit market conditions.