10 Febuary 2010
Fitch Ratings has today assigned LLC Victoria-Finance's prospective issuance of two notes of RUB2bn each an expected local currency senior unsecured rating of 'B-', and an expected National Long-term rating of 'BB(rus)'. The Long-term foreign and local currency Issuer Default Ratings (IDRs) on OJSC Victoria Group are affirmed at 'B-' and the National Long-term rating at 'BB(rus)'. The Outlooks on all ratings are Stable.
The final rating is contingent upon the receipt of final documents conforming to information already received.
Fitch understands that according to the "offeror" mechanism, the two separate notes to be issued under the issuing entity LLC Victoria-Finance will benefit from an irrevocable "offer" from each holdco - OJSC Victoria Group; CJSC Torkas; LLC Victoria-Moskovia; LLC Victoria-Development; and LLC Victoria-Baltia - to purchase the notes in the event of a default. The agency does not take a view about the effectiveness of the "offeror" mechanism in a liquidation scenario.
However, Fitch also understands that the structure requires noteholders to monitor any event of default at OJSC Victoria Group. The agency also notes that secured and unsecured bank debt are held at the operating companies creating a structural subordination ranking with the proposed issued notes, although management has indicated to Fitch that the company will use part of the issuance proceeds from the proposed notes to reduce the current amount of secured debt.
Notwithstanding the subordinated position of the issuing entity, Fitch assumes that given the group's market position in the Russian food retail market, the prospect of recoveries for noteholders, given default, would likely be based on a "going concern" basis. Based on Fitch's estimated enterprise valuation in a distressed sale scenario the resulting recoveries on the proposed notes equates to a Recovery Rating of 'RR1' (91 - 100% recovery given default), although the assigned recovery is capped at 'RR4' (31-50% recovery prospects given default) given the Russian jurisdiction based on the agency's country-specific treatment of Recovery Ratings. Therefore, there is no notching of the notes from the IDR of OJSC Victoria Group.
Although the group's liquidity profile will improve following the successful issuance of the prospective notes, corporate governance issues, risks inherent in Victoria's expansion plans and competitive pressures from domestic and foreign players continue to constraint the group's ratings.
In rating this issuer, Fitch used the master criteria, "Corporate Rating Methodology", dated 24 November, 2009, "Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers", dated 24 November, 2009 and "Country-Specific Treatment of Recovery Ratings - Revised", dated 26 August, 2006 which are available at www.fitchratings.com.