Fitch Affirms OJSC ALROSA at 'BB'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed Russian diamond producer OJSC ALROSA's (ALROSA) Long-term Issuer Default Rating (IDR) and senior unsecured rating at 'BB'. The Outlook on the Long-term IDR is Stable. ALROSA's Short-term IDR has been affirmed at 'B'.
The affirmation reflects Fitch's increased expectations of ALROSA's capability to maintain leverage (measured as funds from operations adjusted leverage) at levels (2013: 2.4x) commensurate with the 'BBB' rating category, and its improved debt maturity profile following the refinancing of all its short-term bank debt in 2Q14. The company was able to achieve this despite its failure to dispose of its non-core gas assets for USD1.4bn in cash by end-2013.
ALROSA failed to realise its plan to sell its non-core assets to Russian oil major Rosneft by end-2013. According to our previous expectations, the deal would have allowed ALROSA to decrease its leverage by 0.8x to 2.0x in 2014, and to refinance its short-term debt maturities. However, failure to close the deal so far was materially mitigated by its outperformance in 2013 and successful refinancing efforts in 1H14.
The transaction has been postponed indefinitely due to uncertainties related to the assets' reserves and the resulting transaction price. Fitch believe that the deal's counterparties retain their willingness and capacity to conclude the deal. However, given the lack of visibility of the disposal timing and pricing, Fitch have now excluded its potential cash inflow from our rating case.
Liquidity Improved; Refinancing in 4Q15
ALROSA improved its debt profile by refinancing all its RUB30bn short-term bank debt as at end-1Q14, leaving only USD500m (RUB18bn) eurobonds due in November 2014. Nevertheless, ALROSA's 2015 debt maturity is significant at RUB43bn (28% of end-2Q14 debt) and in our view can only be met by raising additional debt. Fitch would expect ALROSA to commence discussions regarding refinance in early 2015, and will closely follow developments in this area.
The Russian Federation (BBB/Negative) and the Republic of Sakha (BBB-/Stable) retained their joint control of the company, after having each offered their 7% stake during the ALROSA's IPO in October 2013. Both shareholders currently hold 44% and 25%, respectively, with control over the Board of Directors and top management.
Moderate strategic ties but weak legal ties with the parents are reflected in a single-notch uplift from ALROSA's standalone rating of 'BB-'. The company benefited from state support during 2008-2009 when the Russian State Depository for Precious Metals and Stones purchased around 40% of 2009 diamond sales, and state-owned Bank VTB refinanced ALROSA's short-term debt.
Negative: Future developments that could lead to negative rating action include:
- Reduced support from the Russian Federation
- Funds from operations (FFO) adjusted gross leverage above 3.0x on a sustained basis
- EBITDAR margin below 25% (FY13: 41%)
Positive: Future developments that could lead to positive rating action include:
-FFO adjusted gross leverage sustained below 2.0x together with positive free cash flow generation.