Moody's assigns B2 to Cherkizovo Group, stable outlook
MOSCOW. May 18 (Interfax) - Moody's Investors Service on Tuesday assigned a B2 corporate family rating (CFR) and B2 probability of default rating (PDR) to OJSC Cherkizovo Group ("Cherkizovo"), a leading integrated and diversified meat producer in Russia, the agency said in a statement said. The statement said that Moody's Interfax Rating Agency, which is majority owned by Moody's, assigned an A3.ru national scale credit rating ("NSR") to the company.
The statement said: "According to Moody's and Moody's Interfax ("Moody's"), the B2 global scale ratings reflect the company's global default and loss expectation, while the A3.ru NSR reflects the standing of the company's credit quality relative to its domestic peers.
"Cherkizovo's B2 CFR is strongly positioned in its rating category and largely balances the company's solid market position and business growth prospects with the risks of its relatively limited size, concentration on Russia's emerging market and developing financial and liquidity profile. Moody's positively noted the company's growth in the recent years driven by its refocusing on high-margin poultry and pork segments and a material improvement in the financial profile, with the 2009 financial metrics strong for the ratings category (2.7x adjusted Debt/EBITDA and RCF to Net Debt of 36.3%). However, given the lack of the track record of these strong metrics, the company's market-reasoned focus on further growth and volatilities of its commoditized business, Moody's would see a degree of uncertainty of the financial profile development going forward. The company's ratings also factor in its concentrated ownership and the risk of Russia's somewhat vulnerable and immature operating environment, which may be even more pronounced for domestic meat producers due to their dependence on the state's protection regime.
"Cherkizovo has a leading position in Russia's market, which is underpinned by its diversified meat product output and portfolio of known brands, regionally spread operations, developed distribution network, well-invested high-margin poultry and pork facilities, and established access to the Russian state's financial support for agricultural businesses. The company is to benefit from the domestic large but still highly-fragmented meat product market, where the demand for poultry and pork, Cherkizovo's key product groups, is expected to grow, driven by increasing consumer incomes, capped imports and favorable pricing environment.
"Having invested in its growth in the poultry and pork segments, the company is now at a more mature stage of its investment cycle. Cherkizovo's 2010-2013 investment programme of US$380 million focuses on the completion of the on-going investment projects in the poultry segment. This is supplemented by a related-party acquisition of two greenfield pork complexes valued at US$100 million to be implemented in 2010. However, Moody's understands that the company considers new business opportunities on the competitive market, including both potentially attractive M&A transactions or greenfield projects. The company may need to maintain a higher level of investments to secure its market leadership and see its financial profile pressured. Cherkizovo is yet to demonstrate its ability and commitment to sustainably deliver free cash flow and cap its leverage at around 3x. This may be additionally challenging, given the risks of volatilities of raw material and low value-added meat product prices, losses from the meat processing business, possible shifts in the state's support policy regarding the domestic agricultural sector, exposures to biological risks and food safety issues. Should its growth strategy shift towards M&As or assume new sizable greenfield projects, the company will face essential execution risks.
"Cherkizovo has a very small share of debt under financial covenants. The company significantly benefits from the state's subsidized credit facilities opened with the state-owned banks, which account for the major part of its total debt. However, Moody's views the company's liquidity profile as not fully comforted at this stage, given sizable short-term obligations relative to the cash reserves and limited amount of revolving facilities for general purpose. As of the end of Q1 2010, only approximately 40% of the company's short-term debt obligations were covered by its cash reserves (about US$46 million in dollar terms). Moody's positively notes that around 15% of the formally short-term debt obligations are represented by obligations under subsidized credit facilities opened with Sberbank, which have been used so far actually as revolving facilities. However, this can not fully comfort the company's liquidity. The latter remains dependant on Cherkizovo's cash generation in line with its plan and is contingent on the company's actual versus planned capex. Moody's sees Cherkizovo's established long-term relationship with the state-owned banks as a supportive factor for its liquidity profile going forward.
"The rating outlook is stable as Cherkizovo has solid headroom under its financial metrics within the current rating category.
"Should the company sustain its commitment to a conservative financial policy, deliver consistently increasing free cash flow, cap its adjusted Debt to EBITDA below 3x and fully comfort its liquidity profile through continued execution of its growth strategy, the ratings could be upgraded.
"Negative pressure on the rating would develop should the company switch to an aggressive financial policy, with the adjusted leverage trending towards 4x.
"The principal methodology used in rating Cherkizovo is Moody's Global Food - Protein and Agriculture Industry Rating Methodology, September 2009, which can be found at moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website. Cherkizovo is a leading integrated and diversified meat producer in Russia. The company's key production facilities include six meat processing plants, four poultry and five pork production complexes and a combined fodder production plant. The facilities are located in the Moscow region, which forms the key market for the company, and in other regions of European Russia. Cherkizovo's 2009 dollar-measured consolidated sales was US$1,022.5 million, with the company's processed meat products, poultry and pork segments generating 45%, 44% and 11%, respectively. It is poultry and pork businesses that are the company's growth drivers and key contributors to its EBITDA: approximately 63% and 27%, respectively."