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Rating Action:

Moody's downgraded X5's ratings to B2/A3.ru; outlook stable

Global Credit Research - 03 Mar 2011

Moscow, March 03, 2011 -- Moody's Investors Service has today downgraded to B2 from B1 the Corporate Family Rating (CFR) and Probability of Default Rating (PDR) of X5 Retail Group N.V. ("X5"). The outlook on the ratings is stable. At the same time, Moody's Interfax Rating Agency, which is majority-owned by Moody's, downgraded X5's national scale credit rating (NSR) to A3.ru from A1.ru. This concludes the review for possible downgrade initiated on December 10, 2010 following the announcement that X5 signed an agreement to acquire OJSC Trade House Kopeyka ("Kopeyka"), a Russian discount food retailer, in a RUB51.5 billion (around US$1,661 million) transaction.

RATINGS RATIONALE

The ratings downgrade reflects the expected deterioration of X5's financial profile as a result of the Kopeyka acquisition, which is large and debt-funded, and Moody's expectation that X5 will not restore it over the next 18 months to levels fully consistent with Moody's existing rating guidance for a B1 rating in an emerging market business: adjusted Debt/EBITDA at around 4x maximum with a further downward trend, RCF/Net Debt in high teens and EBITA/Interest above 2.5x (all ratios incorporate Moody's standard adjustments). As it was estimated by Moody's, following the transaction the company's end-2010 pro-forma Debt/EBITDA could exceed 5.0x (incorporating Moody's standard adjustments). Moody's anticipation that X5's will not quickly reduce its financial leverage factors in the company's return to a pre-crisis aggressive growth strategy which is confirmed in particular by the company's plan to double the upper threshold for the 2011 capex to RUB40 billion (US$1.3 billion) including VAT. Large investments are likely to postpone the company's de-leveraging towards levels consistent with the B1 rating category. Moody's further notes that this ambitious plan will likely require the company to contract additional financing sources over the next year if executed at this level.

Moody's understands that X5 is reasonably flexible with its investments and the pace of a recovery of its financial profile is to a high degree management's choice. The agency acknowledges that management has chosen for an ambitious growth strategy and a higher leverage tolerance to further strengthen the company's leading positions in Russia's very fragmented food retail market, which has a high growth potential.

The stable outlook reflects Moody's view that X5 is strongly positioned in the B2 rating category. Moody's recognizes X5's strong business fundamentals and leading market position in the defensive food retail sector -- advantages that will be supported by the addition of Kopeyka's discounter chain. To maintain the B2 rating, the agency expects X5 to strengthen its Debt/EBITDA and RCF/Net Debt to around 4.5x and mid-teens within the next 12-18 months and sustain these levels going forward (all ratios include Moody's standard adjustments). The agency would additionally expect the company's liquidity profile to be consistent with a B2 rating.

An improved financial profiles supported by the above mentioned B1-consistent credit metrics and a strong liquidity profile, could put upward pressure on the ratings. However, in light of X5's sizable investment programme, Moody's does not envisage an upward pressure in the near term.

Downward rating pressure could develop if Debt/EBITDA and RCF/Net Debt were to be sustained at around 5x and low-teens, respectively. A material deterioration of the liquidity profile, including reduced headroom under covenants below 10%, could also put downward pressure on the ratings.

The last action on X5 was implemented on 10 December 2010, when Moody's placed the ratings under review for possible downgrade.

The principal methodology used in this rating was Global Retail Industry published in December 2006.

Headquartered in the Netherlands, X5 is the leading multi-format Russian food retailer. X5's 2009 net revenues were US$ 8.7 billion, with soft discounter format, supermarkets and hypermarkets accounting for around 50%, 31% and 19%, respectively. X5 is a member of the Alfa Group Consortium, one of a few Russia-focused private industrial and financial conglomerates. The parent company of the consortium is the ultimate parent company of X5. Alfa Group beneficiary shareholders control 47.9% of X5, while the management of the latter holds 1.9%.

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 differ from Moody's global scale ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".ru" for Russia. For further information on Moody's approach to national scale ratings, please refer to Moody's Rating Implementation Guidance published in August 2010 entitled "Mapping Moody's National Scale Ratings to Global Scale Ratings."

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Moody's Interfax Rating Agency (MIRA) specializes in credit risk analysis in Russia. MIRA is 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).

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Ekaterina Botvinova
Vice President - Senior Analyst
Corporate Finance Group
Moody's Eastern Europe LLC
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MD - Corporate Finance
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Moody's downgraded X5's ratings to B2/A3.ru; outlook stable
No Related Data.
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