Fitch affirms United Confectioners, outlook negative
MOSCOW. Oct 2 (Interfax) - Fitch Ratings has affirmed Russia-based OJSC Holding Company United Confectioners' (UC) Long-term foreign currency Issuer Default Rating (IDR) at 'B' and National Long-term Rating at 'BBB-(rus)', the agency said in a press release.
At the same time, the ratings have been removed from the Rating Watch Negative (RWN). The Rating Outlook is Negative.
Fitch also affirmed UC subsidiary, OOO United Confectioners-Finance's (UC Finance) 7.7% RUB3bn bond due May 2012 at 'B' and 15% RUB3bn bond due April 2013 at 'B-'. The Recovery Rating for the 2012 bond is 'RR4', reflecting expected recovery prospects in a distressed scenario of 31%-50%, while the Recovery Rating for the 2013 bond is 'RR5' reflects expected recoveries of 11%-30%. These recovery ratings reflect the different guarantee structures between the bonds.
The IDRs and National Long-term rating reflect UC's leading market position supported by a portfolio of strong national and regional brands, and its resilient operating performance amid the economic downturn in Russia. The Negative Outlook reflects concerns surrounding UC's corporate governance, including inter-company transactions with a related bank. Other concerns include the company's sizable debt maturities over the medium term and an expected increase in forex risk arising from the group's expansion over the next few years.
In line with Fitch's expectations, UC's profitability started to recover in Q408 and this continued in H109, despite the challenging environment in Russia. In FY08 UC reported 14.5% EBITDA margin as opposed to 12.7% in FY07, and in H109 it was 13.4% compared to 8.3% in H108. Free cash flow (FCF) was negative in FY08 but is expected to turn positive in FY09 as EBITDA improves and capex drops considerably.
Although the company's debt levels increased RUB2.3bn to RUB11bn in FY08, total debt /EBITDA declined to 2.6x from 3.1x, due to better operating margins. In H109 total debt declined RUB1.1bn, thus improving the total debt/last 12 months EBITDA to around 2x. This trend is expected to continue in the near term although at a slower pace, assuming the company does not accelerate the next phase of its investment programme or engage in substantial M&A activity.
As is typical in Russia, UC retains a short-tenor debt structure, with around 58.6% of company's debt maturing in next 2-2.5 years. This results in ongoing refinancing needs over the medium-term, with the nearest potential repayment being a May 2010 put option on the company's 7.7% bond due in 2013. Fitch believes that UC's existing cash and committed bank lines, together with projected FCF, should be sufficient to enable the company to repay that put, should it be necessary.