Dec 18 - Fitch Ratings has assigned Russia-based retailer LLC O'KEY's
(O'KEY) five-year RUB3bn domestic bond a local currency senior unsecured rating
of 'B+' with a Recovery Rating of 'RR4', and a National Long-term Rating of
The bond (02 series) is the first tranche issued under the RUB8bn
exchange-traded ruble bond issue programme registered in October 2012 and the
rating is in line with the 'B+(EXP)' rating assigned to the programme.
The notes are structured as unsecured, with surety of CJSC Dorinda, the group's
key asset holder, and do not contain any financial covenants. They carry a
coupon rate of 10.1% per annum payable on a semi-annual basis and fixed up to
the put option date of 17 December 2015. The bonds will mature on 12 December
2017. Fitch understands that O'KEY will mainly use the bond proceeds to fund a
Strong Russian Hypermarket Operator
The ratings reflect O'KEY Group S.A.'s strong position in the growing
hypermarket food retail segment in Russia and its management expertise. The
group's hypermarket format enables it to take advantage of the shift in Russian
food retailing towards more modern retail chains. The ratings also reflect the
group's small scale compared with other listed and international leading food
retail operators in Russia.
The group's operating performance is at the high end of the main food retailers
in terms of sales/sq. m and EBITDA margin. However, Fitch believes that the
group's exposure to the hypermarket segment, its more upmarket product range and
non-food operations, plus its development in secondary cities make O'KEY more
vulnerable to a potential worsening of the macroeconomic environment than
Tougher Competition Among Hypermarkets
Intensifying competition means more pressure on retailers' operating margins in
general. However, Fitch expects that the group's expansion will enable O'KEY to
reinforce its purchasing power over suppliers.
Negative Free Cash Flow
The company aims to be in 25 large cities by 2015 (17 as of end-2011). Rapid
expansion requires investment in store openings as the company grows through
both owned and leased stores. Consequently, Fitch expects the group's FCF to
remain negative in the coming years. Its growth plans entail execution risks in
the medium term, such as finding new profitable locations with decent
infrastructure, being able to get local authorisation on time or find new
logistics partners with the same good level of execution.
Capex Partially Internally Financed
Fitch expects the group to finance around 58% of capex by internal free cash
flow. O'KEY will need to raise new long-term debt to sustain its developing
programme at the current level. Fitch notes that a large part of capex is
discretionary as it is related to opening new stores, and that maintenance and
committed capex are relatively low.
Operating Leases Increase Leverage
O'KEY is expanding its hypermarkets and supermarkets through owned and leased
stores, with a 50/50 split over time. As a result, Fitch expects the group's
operating leases to increase with the expansion programme. Fitch expects O'KEY
lease-adjusted net debt/FFO to increase towards 3.5x on average in the next two
years, which is in line with the group's ratings.
Future developments that may, individually or collectively, lead to positive
rating action include
- O'Key showing solid execution of its expansion plan
- The group's capacity to show positive like-for-like sales growth
- Maintaining the group's EBITDA margin of at least 7.5%-8%.
Fitch acknowledges that an improvement in the group's free cash flow would be
viewed as a supplementary rating positive factor. Fitch also expects the group's
size to reach at least EUR500m in EBITDA terms. In terms of leverage, for a
'BB-' rating Fitch expects an adjusted net debt/FFO ratio falling permanently
towards 2.5x and FFO/fixed charge >3.5x.
Future developments that may, individually or collectively, lead to negative
rating action include:
- A sharp contraction relative to its peers of like-for-like sales and EBITDA
margin erosion (7%) combined with FFO adjusted net leverage remaining above 4x
(3.5x on EBITDAR basis).
Additional information is available on www.fitchratings.com. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
Applicable criteria, 'Corporate Rating Methodology' dated 8 August 2012, are
available at www.fitchratings.com.
Applicable Criteria and Related Research:
Corporate Rating Methodology