Fitch: Equity Placement is Credit Positive for Lenta
However, the transaction will not immediately impact Lenta's ratings as a potential upgrade is conditional, among other factors, on the successful execution of its expansion plan without significant margin sacrifices. Currently Lenta's ratings remain constrained by its small scale (sixth-largest food retailer in Russia) and limited diversification outside its core hypermarket format.
On 21 October 2015, Lenta Ltd. placed new shares (4.3% of increased equity capital), raising USD150m gross proceeds. In addition, the European Bank for Reconstruction and Development (EBRD) sold Lenta Ltd's shares for USD125m reducing its stake in the company to 7.4%. This is the company's second SPO this year, after raising USD225m in March 2015. In both cases, proceeds are streamed down to Lenta LLC, primarily in the form of equity, to fund acceleration in new store roll-outs in 2015-2016.
The transaction is positive for Lenta's credit profile as it will enable the company to speed up its store network expansion without increasing leverage, and gain market share from traditional and small modern retailers hit by the current tough operating environment in Russia. In addition, raising new equity amid a difficult economic backdrop evidences the group's good access to a variety of funding sources and management's commitment to maintain a stable capital structure reflected in solid interest cover metrics.
Despite increased guidance for new store openings for 2015-16, Fitch expects Lenta's funds from operations (FFO) adjusted leverage to decrease to around 3.5x in 2015 (2014: 3.9x) due to fresh equity injections and growth in EBITDA, balanced by higher capex and working capital investments. Further deleveraging to around 3.0x in 2016-2018 will be supported by growing operating cash flows and maintenance of a negative working capital position. The company's current and expected FFO adjusted leverage metrics are strong relative to the 5.0x 'BB' rating category median for the sector. This supports the Positive Outlook on Lenta's rating.