13 Sep 2010 18:25

Fitch rates vodka maker Synergy 'B', outlook stable

MOSCOW. Sept 13 (Interfax) - Fitch Ratings has assigned Russian vodka maker OAO Synergy a Long-term Issuer Default Rating (IDR) of 'B'. Fitch has also assigned Synergy a National Long-term Rating of 'BBB+'(rus). The Outlooks for the ratings are Stable, the agency said in a press release.

The ratings reflect the competitive strength of Synergy's core business of manufacturing and marketing bottled vodka in Russia, the favourable trends for the industry that arise from a gradual shift of consumption towards higher-priced products, and the company's diversification into food (representing 18% of its RUB18bn - ie approximately USD600m - FY09 sales).

Management's commitment to reduce leverage, combined with the company's track record of issuing equity to finance growth while maintaining a conservative financial structure, further supports the ratings.

These credit strengths are balanced by the company's relatively small size and early stage nature of its strategy compared to international peers, the risks associated with cyclicality of demand for premium-priced consumer products, and the still fragmented Russian vodka industry. Moreover, the company's high working capital needs and relatively modest liquidity further constrain the credit profile. Fitch also notes Synergy's large proportion of secured debt (70% of total debt of RUB6.2bn as of end June 2010) which may subordinate future unsecured borrowings.

With a 10% share, a balanced portfolio of brands by price categories and a well developed distribution platform, Synergy is one of the leading players in the large Russian vodka market. Its pricing power and efficient cost structure underpin its sound operating profit margin for the core business, which is in line with that of international players Diageo plc ('A-'/Stable) and Pernod Ricard ('BB+'/Stable).

Synergy is investing in the marketing and distribution of its federal brands (vodkas that are sold across Russia as opposed to regional brands), although it could face fiercer-than-anticipated competition from peers pursuing similar strategies given, in particular, the large number of players in the Russian vodka market.

Fitch notes the resilience of the company's profits to the 2008-2009 economic crisis, as well as the fact that its rapid targeted growth may put pressure on working capital requirements. In 2009, Synergy was able to protect its operating profit, which improved to RUB2.9bn (USD97m) from 2008's RUB2.5bn due to lower marketing expenditure. However, an increase of terms of payment to customers contributed to significant cash absorption from working capital - equalling RUB2.9bn.

The group's financial risk profile is considered adequate for the ratings, with targeted EBITDA growth potentially generating modest de-leveraging. Currently limited capex requirements, combined with a financial policy not to pay dividends, should contribute to moderate free cash flow generation from FY10. Management's commitment to gradually reduce net debt/EBITDA to 1.5x by FYE11-FYE12 from FYE09's 1.9x and to maintain this level provides further comfort to Fitch's assessment, as well as a track record of using debt/equity to finance growth.

With respect to liquidity, while the company's position was tight as of June 30, 2010 (55% of debt matured in the following twelve months), management successfully obtained new credit lines during Q310 to refinance maturing lines.

Upward rating pressure could result from sustained delivery of the company's revenues and profit growth strategy, an ability to maintain profit margins, a gross lease-adjusted leverage between 1.5x-2x (on a rolling two-year basis) (at FYE09: 2.4x) and consistent positive free cash flow generation. Fitch notes however that a tightening of liquidity could constrain an upgrade.

A negative rating action could follow from adverse regulatory changes heavily affecting vodka consumption in Russia, permanent declining profitability, gross lease-adjusted leverage above 2.5x-3x, and/or consistently negative free cash flow generation.