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Moody's changes to stable from negative the outlook on RG Brands (Kazakhstan)

October 18, 2011 Moody's Investors Service
London, 17 October 2011 -- Moody's Investors Service has today changed to
stable from negative the outlook on the B3 corporate family rating (CFR)
and the B3 probability of default rating (PDR) of JSC RG Brands (RG
Brands). Concurrently, Moody's has affirmed the CFR and the PDR.

RATINGS RATIONALE

"Our decision to change RG Brands' outlook to stable was prompted by our
expectation that the company's operating performance will continue to
improve in line with recent trends ," says Sergei Grishunin, an Assistant
Vice President -- Analyst and Moody's lead analyst for RG Brands. Moody's
expects this improvement to result in (i) a satisfactory liquidity
position in 2011 and the first half of 2012; (ii) a reduction in leverage
(measured by adjusted debt/EBITDA) toward the 3.5x range; and (iii)
maintenance of EBITA margin and funds from operations/debt above 10%
over the next 12-18 months.

Moody's forecasts for RG Brands assume a compound annual revenue growth
rate (CAGR) of around 20% in 2011-12 driven by (i) an increase in the
level of disposable income among the population of central Asia, as a
result of which more is being spent on food and beverages; (ii) an
increase in RG Brands' market shares in the juice, UHT milk, water and
packaged tea segments due to improvement of customer sentiment/loyalty;
and (iii) the company's penetration of markets of neighbouring countries.

Moody's also expects RG Brands' EBITA margin to grow beyond 10% due to
the company's launch of high value-added packaging, flavours and products
and an increase in capacity utilisation. Indeed, Moody's anticipates the
aforementioned improvements in RG Brands' credit metrics to result from
this growth combined with the following: (i) a stabilisation of the
Kazakhstani tenge (KZT), in which RG Brands reports its earnings; (ii)
the company's low capital expenditure (capex) requirements; and (iii) a
stabilisation of the level of the company's adjusted debt of around KZT20
billion in 2011-12. Moody's expects RG Brands to be in compliance with
its debt covenants in financial year ended 2011.

In Moody's view, RG Brands' liquidity position has improved since 2010.
This improvement was underpinned by (i) stronger cash flow generation;
and (ii) an improving debt structure as a result of the company's access
to recently arranged revolving debt facilities in form of letters of
credit, which now represent around 20% of its total outstanding debt. RG
Brands has cash reserves and inflows of around KZT668 millions in the
next 12 months starting from the third quarter of 2011. Moody's expects
these to be sufficient to cover the company's debt maturities, working
capital requirements and capex spending in the same period. RG Brands'
liquidity position may be further enhanced by (i) the discretionary
nature of the company's capex; (ii) its historical ability to lease fixed
assets instead of purchasing them; (iii) expected partial repayment of
intercompany receivables from RG Brands shareholder JSC Group of companies
RESMI; and (iv) the fact that the company is in the final stages of
negotiations with a number of credit institutions for additional
multi-year lines totaling around KZT3.7 billion.

The affirmation of RG Brands' CFR and PDR reflects that RG Brands'
ratings continue to be constrained by (i) its relatively limited scale
of operations; (ii) the low capacity utilisation of the company's
carbonated soft drinks production facilities (around 60% of spare
capacity in 2011); (iii) its limited geographical diversification, with
revenues derived mainly from Central Asia; (iv) material related party
transactions; and (v) its exposure to Commonwealth of Independent States
(CIS)-related risk factors.

However, more positively, the rating affirmation also reflects (i)
Moody's expectation that RG Brands will continue to benefit from its
leading position in Central Asian markets; (ii) the diversified nature of
RG Brands' product portfolio, with strong brand names; (iii) the
long-term nature of the company's exclusive bottling agreement with
PepsiCo; and (iv) its developed distribution network.

WHAT COULD CHANGE THE RATINGS UP/DOWN

To consider upgrading RG Brands' ratings, Moody's would require the
company to establish a track record of sustainably delivering on s
financial targets including (i) a reduction in adjusted debt/EBITDA to
below 3.5x; and (ii) maintenance of EBITA margin funds from
operations/debt above 10%. In addition, Moody's would require RG Brands
to maintain a satisfactory liquidity position and comply with all its
debt covenants.

RG Brands' ratings could come under pressure in the event that (i) as a
result of an insufficient improvement in both RG Brands' operating
performance and cash flow generation, the company were unable to
demonstrate track record of improvements in profitability and credit
metrics as anticipated over the next 12-18 months; or (i) the company
were unable to maintain adequate liquidity or to generate sufficient
headroom under its debt covenants.

PRINCIPAL METHODOLOGY

The principal methodology used in rating JSC RG Brands was the Global
Packaged Goods Industry Methodology published in July 2009. Please see
the Credit Policy page on www.moodys.com for a copy of this methodology.

Headquartered in Almaty, Kazakhstan, RG Brands is a leading manufacturer
and distributor of beverages, food products and snacks, with operations
predominantly in the Republic of Kazakhstan and Central Asia.

Company — RG Brands
  • Industry
    Food industry