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Rating Action:

Moody's upgrades X5's rating to Ba1; stable outlook

03 Apr 2019

London, 03 April 2019 -- Moody's Investors Service ("Moody's") has today upgraded to Ba1 from Ba2 the corporate family rating (CFR) and to Ba1-PD from Ba2-PD the probability of default rating (PDR) of X5 Retail Group N.V. (X5), Russia's largest food retailer. The outlook is stable changed from positive.

"We have upgraded X5's ratings based on our expectation that the company will be able to sustain its strong operational and financial performance, pursue a prudent financial policy, adequately sizing capital spending and dividends, and maintain robust liquidity," says Mikhail Shipilov, an Assistant Vice President -- Analyst at Moody's.

RATINGS RATIONALE

Today's upgrade of X5's ratings reflects the company's strong sales growth, leading market position and solid and sustainable profitability, despite growing competition in Russia's food retail market and fragile consumer environment. The company's robust operating performance and increase in scale somewhat compensate for the lack of improvement in its credit metrics. The rating action also reflects Moody's expectation that the company will maintain leverage sustainably within the threshold for its Ba1 rating, adhere to its prudent financial policy and retain healthy liquidity.

The company increased its revenue by 18% in 2018 and 25% in 2017, and is likely to see low double-digit growth in percentage terms in 2019-20. Its scale, operational excellence and ample financial and managerial resources help X5 to maintain sizeable store roll outs, building up market share and ousting smaller competitors. At the same time, the company preserved continuous like-for-like sales growth over the last five years, a sheer differentiator from its domestic peers.

X5's profitability is solid, with Moody's adjusted EBITDA margin at 12.1% in 2018 and 12.4% in 2017. While the margin may slip by 20-30 basis points over the next couple of years because of high competition for constrained consumer budgets in Russia, profitability will still remain attractive for this sector and relatively high, compared with that of its European peers.

Moody's also expects X5 to maintain its healthy credit metrics, with Moody's adjusted debt/EBITDA remaining at around 3.2x-3.3x in 2019-20, the same as in 2016-18, and retained cash flow/net debt staying close to 20%. The company has a strong track record of adherence to its reasonably conservative financial policy, appropriately balancing capital spending and dividend payments against the 1.8x net debt/EBITDA target on a pre-IFRS 16 reported basis. However, deleveraging below this level is unlikely because of cash needs for ongoing expansion and growing shareholder distributions.

X5's Ba1 rating also factors in its (1) leading market position as the largest Russian food retailer, with $25 billion of revenue generated in 2018; (2) track record of solid operating performance, with industry-leading revenue growth; (3) viable business model with a focus on the defensive economy-class grocery segment, operating efficiencies, and the quality of its offering; (4) development efforts in digital marketing, information and big data technologies, online sales and omnichannel capabilities; (5) resilience to economic cycles and ability to adapt to changes in consumer demand; (6) the still-attractive fundamentals of the Russian food retail market for large companies; and (7) the company's good liquidity, underpinned by its sizable unutilized credit lines and mostly discretionary nature of its capital spending.

However, X5's credit quality is constrained by (1) the difficult consumer environment, with stagnating real disposable income and falling consumer confidence, (2) intensifying competition among Russia's top retailers for consumers as well as for new store locations; (3) a lack of geographical diversification, with the company's sole exposure to Russia's less-developed regulatory, political and legal framework; and (4) high expansion capital spending and sizeable dividends which will continue to weigh on its free cash flow.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects Moody's expectation that the company will sustain its robust operational and financial performance as well as leading market position. The outlook also assumes that X5's adjusted debt/EBITDA will remain below 3.5x on a sustainable basis.

WHAT COULD CHANGE THE RATING UP/DOWN

Moody's does not anticipate positive pressure on the rating to develop over the next two years. However, over time, upward pressure on the rating could build up if X5 was to (1) improve its credit profile such that its Moody's-adjusted gross debt/EBITDA falls below 2.5x and retained cash flow/net debt increases above 25%, both on a sustainable basis, (2) materially increase its market share and/or geographical footprint, (3) sustain solid operational performance, with no deterioration in profitability, (4) maintain strong liquidity, and (5) continue to pursue its prudent financial policy.

Moody's could downgrade the rating if the company's (1) Moody's-adjusted gross debt/EBITDA was to rise above 3.5x and retained cash flow/net debt was to fall below 15%, both on a sustained basis, (2) operating performance or market position were to weaken materially, and (3) liquidity was to deteriorate.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Retail Industry published in May 2018. 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 the largest multi-format retailer in Russia. The company operates a chain of food retail stores with a particular focus on proximity stores under the brand name Pyaterochka. It also operates Perekrestok supermarkets and Karusel hypermarkets. As of year-end 2018, the company had 14,431 stores (6.5 million square metres of net selling space) in around 2,900 cities and towns in seven Russian Federal Districts, employing 278,399 staff. In 2018, X5 generated around RUB1,533 billion of revenue and RUB186 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.

Mikhail Shipilov
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
Client Service: 44 20 7772 5454

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

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
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United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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