(The following statement was released by the rating agency)
— OOO X5 Finance is a finance subsidiary of Russias largest grocery
retail chain, X5 Retail Group.
— We see the likelihood that X5 Retail Group would provide parental
support to X5 Finance as high.
— We are affirming our B+ corporate credit rating on X5 Retail Group
— We are assigning our B+ long-term rating to X5 Finance, equal with
the rating on X5 Retail Group NV
— We are also assigning a 3 recovery rating to X5 Finances RUB9
billion unsecured notes due 2014 and RUB8 billion unsecured notes due 2016,
and affirming the B+ issue rating on these notes, and removing them from
— The stable outlook on the long-term rating mirrors the outlook on X5
On April 27, 2011, Standard Poors Ratings Services affirmed its B+
long-term corporate credit rating on X5 Retail Group NV and assigned its
B+ long-term corporate credit rating to OOO X5 Finance, the finance
subsidiary of X5 Retail Group NV (B+/Stable/–). The outlook on both
entities is stable.
We assigned a 3 recovery rating to X5 Finances existing Russian ruble (RUB)
9 billion and RUB8 billion unsecured notes due 2014 and 2016. The B+ issue
ratings on these notes were affirmed and removed from CreditWatch with
negative implications, where they were placed on Feb. 10, 2011.
The B+ issue ratings on the bonds reflect the B+ issuer credit rating and
our 3 recovery rating.
We equalize the rating on OOO X5 Finance with that on the ultimate parent X5
Retail Group because we see the likelihood that X5 Retail Group would provide
parental support to X5 Finance as high. Our view is underpinned by the
— X5 Retail Group guarantees all the debt of X5 Finance. Although the
suretyship provided by X5 Retail Group NV doesnt fully meet our criteria on
guarantees, we nevertheless see it as an important sign of X5 Retail Groups
willingness to support its finance subsidiaries. The proceeds of the issued
bonds are lent on to the various companies within the group.
— The finance subsidiaries are closely associated with X5 Retail Group
and if one of them were to default, it would limit X5 Retail Groups access to
— X5 Retail Group has 100% indirect ownership and full management
control of the financial subsidiary.
— There is a cross-default clause with X5 Finances bilateral and
The suretyship prepared in accordance with the Russian law and provided by X5
Retail Group NV for the bonds issued by X5 Finance doesnt fully meet our
criteria on guarantees, in our view. Notably, under the surety agreement:
— The guarantor will repay the debt only after it receives a request
from the bondholder, which might take more than the five days required by our
— The guarantor has to pay only the difference between the amount
payable and the amount already paid by the issuer.
— The guarantor has the right to terminate the suretyship, if the
issuers obligations are changed and such change leads to an enlargement of
responsibility or any other unfavorable consequences.
— The guarantor does not waive its rights of set-off or counterclaim.
The rating on X5 Retail Group NV, which owns Russias largest grocery retail
network, reflects what we see as the groups aggressive growth strategy and
financial policy and exposure to a volatile emerging market economy. Standard
Poors does not factor into the rating major unforeseen debt-financed
acquisitions or changes to shareholder remuneration.
We revised X5s liquidity assessment to adequate from less than adequate,
reflecting a longer track record of prudent liquidity management. X5s ratio
of liquidity sources to uses equaled 1.24x as of Dec. 31, 2011.
Liquidity sources are comprised of the following:
— Surplus cash reserves of about $230 million;
— Undrawn long-term committed lines totaling $264 million, although
available funds under both committed and uncommitted lines totaled $1.65
— Operating cash flow of about $1.14 billion in 2012
Liquidity uses are represented by:
— Short-term debt of $918 million; and
— Capital spending of $400 million under our conservative credit
scenario, which factors in the companys flexibility to decrease capital
expenditures in response to a deteriorating operating environment or
tightening credit markets.
On Dec 31, 2011, X5 was in compliance with the covenants for its syndicated
loan and had adequate headroom. X5s liquidity benefits from the companys
relationship with several large foreign and Russian state-owned and commercial
Flexibility provided by the largely discretionary nature of the groups
capital-investment requirements also supports X5s liquidity, in our view.
The issue rating on the RUB8 billion Series 4 notes due 2016 (2016 notes)
and RUB9 billion Series 1 notes due 2014 (2014 notes) issued by X5 Finance
is B+, the same as the corporate credit rating on X5 Finance. The recovery
rating on these debt instruments is 3, indicating our expectation of
meaningful (50%-70%) recovery in the event of a payment default. The 2014
notes and 2016 notes are unsecured obligations of X5 Finance.
X5 Retail Group NV provides support for the notes issued by X5 Finance in
the form of suretyship agreements governed by Russian law. We believe that the
suretyship undertakings prepared in accordance with the Russian law and
provided by X5 Retail Group NV are a weaker form of support than on-demand
guarantees and do not fully meet Standard Poors criteria on guarantees for
rating substitution purposes (see the reasons listed in the Rationale
Notwithstanding the above, we believe that the surety agreements, combined
with the factors that justify our equalization of the corporate credit rating
on X5 Finance with that on X5 Retail Group, have sufficient strength for us to
assign a recovery rating to these instruments in line with our estimation of
the recovery prospects for the note holders.
We note that some debt facilities benefit from a structurally senior position
to the rated notes. However, the presence of surety agreements and
intercompany loans partly offsets the structural subordination of the notes.
For the purpose of our recovery analysis, we have assumed that most debt
facilities would rank equally with the notes at our simulated point of default.
To calculate recovery, we simulate a hypothetical default scenario, triggered
mainly by increasing competition, negative foreign currency movements, and an
inability to refinance maturing debt in 2014, with EBITDA declining to about
We have valued X5 Retail Group as a going concern, given its leading market
position in Russia. Using a market-multiple approach, we estimate X5 Retail
Groups stressed enterprise value at about $4.0 billion at our hypothetical
point of default.
We then deduct about $900 million of priority liabilities, consisting of
enforcement costs, and debt at recently acquired Open Joint Stock Co. Trade
House Kopeyka (NR). The net residual value available for the various debt
instruments, assumed to amount to about $4.7 billion, is about $3.1 billion.
The recovery prospects are thus in the 50%-70% range.
The stable outlook reflects that on X5 Retail Group. We expect the rating on
X5 Finance to change in line with the ratings on X5 Retail Group NV
Related Criteria And Research
— Methodology And Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Sept. 28, 2011
— Criteria Guidelines For Recovery Ratings On Global Industrials
Issuers Speculative-Grade Debt, Aug. 10, 2009
— Criteria Methodology: Business Risk/Financial Risk Matrix Expanded,
May 27, 2009
— Key credit factors: Business and Financial Risks in the Retail
Industry, Sept. 18, 2008
— 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
OOO X5 Finance
Corporate Credit Rating B+/Stable/–
X5 Retail Group NV
Corporate Credit Rating B+/Stable/–
Ratings Affirmed; CreditWatch/Outlook Action; New Rating
OOO X5 Finance
RUB8 bil 18.46% puttable bnds ser 4* B+ B+ /Watch Neg
Recovery Rating 3 NR
RUB9 bil bnds ser 1 due 07/01/2014* B+ B+ /Watch Neg
Recovery Rating 3 NR
*Guaranteed by: X5 retail Group NV
(Caryn Trokie, New York Ratings Unit)