16 Feb 2010 18:46

Standard & Poor

MOSCOW. Feb 16 (Interfax) - Standard & Poor's Ratings said on Tuesday that it has revised its outlook on X5 Retail Group N.V., owner of Russia's largest grocery retail network, to stable from negative. The agency said in a statement that at the same time, the 'BB-' long-term corporate credit and 'ruAA-' Russia national scale ratings on X5, its related entities, and their respective issue ratings were affirmed.

The statement said: "X5 Retail Group, owner of Russia's largest grocery retail network, has improved its liquidity position. We are revising our outlook on X5 to stable from negative and affirming our 'BB-' long-term and 'ruAA-' national scale ratings on the company. The stable outlook reflects our expectation that new committed lines and available cash balances should support liquidity over the next 12 months."

"The outlook revision primarily reflects the improvement in X5's liquidity position, but also its resilient operating performance and more conservative financial policy," said Standard & Poor's credit analyst Anton Geyze.

The statement said: "At the end of 2009, X5 obtained a five-year $1.1 billion committed line from Sberbank and a number of smaller committed lines from foreign and state-owned banks. Additionally, in the 12 months to Sept. 30, 2009, X5 generated free operating cash flow (FOCF) of $337 million, which allowed the company to accumulate meaningful cash balances. These sources secure the company's liquidity position over the next 12 months."

The statement said: "We believe that debt metrics will improve further on the back of organic growth, supported by expanded selling space and flat nominal net debt, because we expect discretionary cash flow to be neutral. We also expect any unforeseen transformational acquisitions to be funded largely through equity issuance. The ratings do not factor in any major acquisitions or changes to the shareholder remuneration policy."

The statement said: "X5's significant unhedged exposure to foreign exchange borrowings remains an important restricting factor for its credit profile. The company generates almost all of its revenues in Russian rubles, while about 60% of its debt is in U.S. dollars. As the company does not fully hedge its foreign exchange risk exposure, X5 is dependent upon exchange rate fluctuations."

The statement said: "The stable outlook reflects our expectation of X5's continuing resilient operating performance and stable cash flow generation."

"We expect the company to continue demonstrating a relatively prudent financial policy, which would include sound liquidity management and avoiding any opportunistic debt financed acquisitions," Geyze was quoted as saying. "Such acquisitions might put the company's liquidity at risk in the future, because potential acquisition targets in Russia often have mostly short-term debt maturity profiles," he said.

The statement said: "We could lower the ratings in case of a significant increase in X5's financial aggressiveness that would lead to deterioration of credit protection metrics. To maintain the current ratings, we expect the company's adjusted debt to EBITDA to be about 3.5x and adjusted funds from operations to be in the range of 15% to 20%. Ratings downside could also result in case of substantial ruble depreciation negatively affecting debt protection metrics and covenant headroom."

The statement said: "Ratings upside would require further deleveraging and improvement in the capital structure in terms of duration and currencies. It would also require a longer track record of financial prudence, and a publicly formulated financial policy. Operational metrics should also remain supportive, meaning that the company should prove capable of adjusting its business to the weakening economic conditions and maintaining its market position."