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Global Credit Research - 18 May 2010
Moscow, May 18, 2010 -- Moody's Investors Service has today 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 rating outlook is stable. At
the same time, Moody's Interfax Rating Agency, which
is majority owned by Moody's, assigned a A3.ru national
scale credit rating ("NSR") to the company.
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
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
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.
NATIONAL SCALE RATINGS
Moody's Interfax Rating Agency's National Scale Ratings (NSRs) are intended
as relative measures of creditworthiness among debt issues and issuers
within a country, enabling market participants to better differentiate
relative risks. NSRs in Russia are designated by the ".ru"
suffix. NSRs differ from global scale ratings, as assigned
by Moody's Investors Service, in that they are not globally comparable
to the full universe of Moody's rated entities, but only with other
rated entities within the same country.
ABOUT MOODY'S AND MOODY'S INTERFAX
Moody's Interfax Rating Agency specialises in credit risk analysis in
Russia and is majority owned and controlled by Moody's Investors Service,
a leading provider of credit ratings, research and analysis covering
debt instruments and securities in the global capital markets.
Moody's Investors Service is a subsidiary of Moody's Corporation (NYSE:
MCO). Further information is available at www.moodys.com.
Eric de Bodard
Corporate Finance Group
Moody's France S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's assigns B2 to Cherkizovo Group, stable outlook
Vice President - Senior Analyst
Corporate Finance Group
Moody's Eastern Europe LLC
Telephone: +7 495 228 6060
Facsimile: +7 495 228 6091
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