Moody's downgrades CEDC to Caa2; outlook negative
October 5, 2012 Moody's Investors Service
Milan, October 05, 2012 -- Moody's Investors Service has today downgraded the corporate family rating (CFR) and probability of default rating (PDR) of Central European Distribution Corporation (CEDC) to Caa2 from Caa1. Concurrently, Moody's has downgraded to Caa1 from B3 the rating on the senior secured notes due in 2016 issued by CEDC Finance Corporation International. This rating action concludes the review initiated in March 2012. The outlook on the ratings is negative.
"Today's downgrade reflects delays in CEDC securing adequate financing to repay its $310 million of convertible notes due March 2013 which are increasing our concerns that the definitive agreement for a strategic alliance between CEDC and Russian Standard Corporation (Russian Standard) might not conclude at the current terms," says Paolo Leschiutta, a Moody's Vice President - Senior Credit Officer and lead analyst for CEDC.
Moody's notes that CEDC's definitive agreement for a strategic alliance with Russian Standard, announced on 23 April 2012, is subject to shareholders' approval, which the company was originally expected to receive on 29 June 2012 but has not yet obtained. The delay follows CEDC's announcement on 4 June 2012 that it had discovered some accounting irregularities at its Russian division. The accounting irregularities mainly affect CEDC's 2011 and 2010 financial accounts and delayed the release of CEDC's second-quarter 2012 results and, consequently, a vote by its shareholders on whether to approve the strategic alliance, as well as the provision of financial support by Russian Standard.
Although we understand from the company that the release of its second-quarter results might happen over the coming few days, the ongoing uncertainties related to (1) the capability to refinance the convertible bond maturity in a timely manner; (2) the future capital structure of the group, and (3) CEDC's operating performance so far this year indicate, in our view, a higher probability of default. Nonetheless, Moody's acknowledges that Russian Standard has reiterated its commitment to support CEDC after the latter disclosed the accounting irregularities.
Under the current agreement, Russian Standard will provide financial support to CEDC to repay its $310 million of senior convertible notes due March 2013, which, at the current conditions, will not result in any loss for existing bondholders. However, the March 2013 maturity of the convertible notes is approaching, and Moody's remains concerned about CEDC's underlying operating profitability. Despite cash injections of $100 million already received from Russian Standard, CEDC would still be faced with significant short-term debt maturities if it were to fail to obtain shareholders' approval over the coming weeks, resulting in immediate pressure being exerted on the company's ratings.
The negative outlook reflects the ongoing uncertainty related to CEDC's future capital structure, including its refinancing plans, and the ongoing difficulties experienced by the company in Russia. In this context, Moody's notes that the majority of its concerns about CEDC's liquidity would be alleviated by the company successfully refinancing its notes with no losses for bondholders. However, the company's key credit metrics are likely to remain weak over the short term.
WHAT COULD CHANGE THE RATING UP/DOWN
Given the negative outlook, Moody's does not currently expect upward rating pressure. However, the outlook on the rating could stabilise if CEDC successfully receive shareholder's approval on Russian Standard's financial support and addresses its refinancing needs related to the $310 million of convertible notes due March 2013.
A further negative action on the ratings could be triggered by (1) a failure on the part of CEDC to demonstrate progress in addressing its refinancing needs over the next few weeks; or (2) any transaction that could qualify as a distressed exchange under Moody's definitions, leading to potential losses for bondholders. Moody's methodology for evaluating a distressed exchange considers inter alia whether (1) the issuer is offering creditors a new package of security or cash, and whether this amounts to a diminished financial obligation relative to the original obligation prescribed by the notes' indentures; and (2) the exchange is being offered to allow the issuer to avoid a bankruptcy or payment default.
For further details on this topic, please see our rating implementation guidance "Moody's Approach to Evaluating Distressed Exchanges", published in March 2009.
..Issuer: Central European Distribution Corporation
.... Probability of Default Rating, Downgraded to Caa2 from Caa1
.... Corporate Family Rating, Downgraded to Caa2 from Caa1.
Issuer: CEDC Finance Corporation International
....Senior Secured Regular Bond, Downgraded to Caa1 (LGD3 - 38%) from B3.
The outlook on the ratings is negative.
The principal methodology used in rating CEDC was the Global Alcoholic Beverage Rating Methodology published in September 2009. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
Headquartered in Warsaw, Poland, CEDC is one of the largest vodka producers in the world, with annual sales of around 33.2 million nine-litre cases, mainly in Russia and Poland. Following investments in Russia over the past two years and the consolidation since February 2011 of Whitehall Group, an importer and distributor of premium spirits and wine, CEDC generated net revenues of around $878 million during financial year-end December 2011.
For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
Information sources used to prepare the rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.
Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.
Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.
Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.
Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.
Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.
Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.
The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
VP - Senior Credit Officer
Corporate Finance Group
Moody's Italia S.r.l
Corso di Porta Romana 68
Eric de Bodard
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's Italia S.r.l
Corso di Porta Romana 68
Company — Roust
Full nameRoust Corporation