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Rating Action:

Moody's upgrades X5 Retail's CFR to Ba2; positive outlook

31 Mar 2017

London, 31 March 2017 -- Moody's Investors Service, (Moody's) has upgraded to Ba2 from Ba3 the corporate family rating (CFR) and to Ba2-PD from Ba3-PD the probability of default rating (PDR) of X5 Retail Group N.V. (X5), Russia's largest food retail company. The outlook on all the ratings is positive.

"Our decision to upgrade X5's ratings reflects its strong sales growth, solid and sustained profitability and improved leverage, despite ongoing unfavourable economic and market conditions in Russia," says Ekaterina Lipatova, an Assistant Vice President -- Analyst with Moody's.

RATINGS RATIONALE

The upgrade of X5's ratings to Ba2 with positive outlook reflects the company's enhanced market positioning as the largest Russian food retailer as of end-2016. The company remains resilient to adverse economic and market developments consistently demonstrating the industry-leading operating performance and steady improvement in its financial profile.

Despite the challenging consumer environment in Russia with consumption shrinking since 2014 and slowing food price inflation starting in H2 2015, X5 has proved its operational leadership supported by (1) its viable business model with a focus on the defensive economy-class grocery segment, operating efficiencies, and the quality of its offering; and (2) its leading market position, which benefits from economies of scale and significant bargaining power.

In 2016, X5 continued to report robust net retail sales growth of 27.5% (27.3% in 2015) as well as healthy like-for-like sales growth of 7.7% (13.7% in 2015). It has also been able to preserve solid profitability with adjusted EBITDA margin improving to 12.3% (11.8% in 2015), despite investment in prices and a substantial management incentive programme.

Taking into account the still attractive market fundamentals for large players, Moody's expects that going forward X5 will be able to sustain sound operating results in line with its ambitious strategic target to achieve 15% market share (8% in 2016) by the end of 2020 via profitable and sustainable growth.

Despite the material step-up in capex to take advantage of existing growth opportunities in the market, X5's financial leverage is also steadily improving towards the guidelines for the Ba1 rating underpinned by strong EBITDA growth. Thus, X5's adjusted debt/EBITDA improved ahead of Moody's initial expectations to 3.2x in 2016 from 3.6x in 2015 and 3.8x in 2014 and Moody's expects that in 2017-18 it will further reduce to below 3.0x.

X5's interest coverage metrics have also been gradually improving, although they still remain somewhat weak, as the company manages to reduce interest rates by negotiating with banks and placing cheaper domestic bonds. The company's strengthening financial profile is further supported by its track record of adherence to a prudent financial and development strategy.

At the same time, the company's rating continues to reflect its exposure to Russia and its political, economic and legal risks, further exacerbated by the currently challenging economic and geopolitical situation.

RATIONALE FOR THE POSITIVE OUTLOOK

The positive outlook reflects the potential for the upgrade of X5's rating over the next 12-18 months based on Moody's expectation that the company will maintain a solid business profile with healthy operating results while continuing to gradually improve its financial metrics and grow its market share.

WHAT COULD CHANGE THE RATING UP/DOWN

Upward pressure on the rating could build if X5 improves its financial profile, such that (1) adjusted total debt/EBITDA reduces below 3.0x and adjusted RCF/net debt increases above 25%, all on a sustainable basis; and (2) the company maintains a solid liquidity profile, while executing on its development programme.

Downward pressure on the rating could result if X5's leverage measured as adjusted total debt/EBITDA goes above 4.0x and adjusted RCF/net debt below 15%, all on a sustained basis. Any deterioration in the company's liquidity, including access to its bank facilities and covenants compliance, could also put downward pressure on the rating.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Retail Industry published in October 2015. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Domiciled in the Netherlands, X5 Retail Group N.V. is one of the leading multi-format Russian retailers, operating a chain of food retail stores under the brand names "Pyaterochka", "Perekrestok" and "Karusel". In 2016, X5 generated around RUB1,034 billion of revenues and RUB128 billion of adjusted EBITDA.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Ekaterina Lipatova
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service Limited, Russian Branch
7th floor, Four Winds Plaza
21 1st Tverskaya-Yamskaya St.
Moscow 125047
Russia
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Victoria Maisuradze
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

No Related Data.
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