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ACRA assigns A-(RU) to Rissa Investments Limited, outlook Stable

The credit rating assigned to Rissa Investments Limited (hereinafter, the Company, or the Group) is underpinned by the low leverage, leading market positions, high profitability, and well-known brands in the Company's portfolio. The rating is limited by high capital expenditures resulting in a negative free cash flow (FCF), and a high share of liabilities denominated in currencies other than the revenue currency.

Rissa Investments Limited is a holding company that consolidates bottled water production assets in Russia, Georgia, and Ukraine. The portfolio of the Company’s brands includes Borjomi, Saint Spring, and others. The key shareholder of the Group is Alfa Finance Holdings Limited.

Key rating assessment factors

The Company's leverage is low. As of December 31, 2019, the Company's ruble-denominated debt amounted to about RUB 10 bln, and the share of such debt in the Company's debt obligations was about 55%, while the share of USD-denominated debt was about 35%, and the remaining debt was denominated in euro and other currencies. ACRA notes that the currency profile of the debt does not match the currency profile of revenue, which pushed up the currency risks facing the Company. The largest lender for the Group is Sberbank (ACRA rating: AAA(RU), outlook Stable), with its share of 37%. Most loans borrowed by the Company are fixed rate loans. The Company's leverage at the end of 2019 was not high: the ratio of total debt to FFO before interest charges was 1.4x. In ACRA's opinion, this ratio may be in range 2.0–3.0x in 2020. In addition to the currency effect, increasing capital expenditures will affect the leverage. In the next two years, according to ACRA's forecast, the leverage may gradually return to the level of 2019. The Company's coverage indicators are high: according to the preliminary results of 2019, the ratio of FFO to net interest charges to interest charges was 7.2x. In the forecast period (2020–2022), ACRA expects this indicator to be in range 4.0–6.0x.

Medium business profile and leading market positions. The Company holds leading positions in all its target markets. As of H2 2019, the Company's share in the Russian market was about 12%, while the share of the closest rivals was 5–7%. According to Agency's estimates, the share of the Russian segment in the Company's revenue is 47%. The Company's share in another major market, Ukrainian, is close to 50%, and the share of the Ukrainian segment in the revenue is 36%. Regardless that the diversification of the Company's product line is low and the number of substitute products is significant, the Agency is of the opinion that the rating is supported by a positive upward trend in the consumption of the Company's products and a high consumer awareness of brands in its portfolio.

Medium liquidity and weak cash flow. In 2020–2021, the Company is expected to come through a peak of its capital expenses. The 2020 CAPEX is planned at RUB 7.5 bln. The Company's current key investment project is aimed at the construction of a production and logistics complex in the Moscow Region.

Against the backdrop of rising capital expenses, the ratio of CAPEX to revenue is expected to increase from 9–10% in 2018–2019 to 18–20% in 2020–2021, which indicates a high load on cash flow. After this, ACRA expects the ratio to go back to 10%. Increased capital expenses will keep the FCF margin negative (minus 8–13% at the end of 2020, according to ACRA's expectations). As the peak of capital expenses passes, the ratio will increase and by 2021, it will return to the near-zero level. A negative FCF puts pressure on the liquidity assessment. The Company's debt repayment schedule in 2020–2022 is rather smooth, with annual repayments of RUB 2–2.5 bln. At the time of the rating analysis, the volume of committed undrawn credit lines amounted to about RUB 1 bln. Although the Company has no formalized dividend policy, its financial strategy contains debt coverage targets, which, in ACRA's opinion, may indicate the lack of dividend payouts in case capex increases.

The profitability is high and the Company's size is assessed as medium. For 2019, the Company's revenue amounted to RUB 33 bln, which is 23% higher than in 2018. ACRA assumes that the ruble revenue may grow in 2020 by 10%. One of the revenue growth drivers in the coming years may become a new production and logistics complex in the Moscow Region, the construction of which is planned to start in 2020. According to ACRA's estimates, the Company's FFO before net interest charges and taxes amounted to RUB 7.1 bln in the end of 2019, which, as per the Agency's methodology, indicates the medium assessment of the Company size. In 2020–2022, ACRA expects the growth rate of the above indicator on par with the growth in revenue, which will allow the Company to maintain the FFO margin before net interest charges and taxes at 19–22%, which is high.

The medium level of corporate governance. The Company's strategy is determined primarily by the business plan, which is regularly reviewed by, among others, third-party advisors. The Company has established a board of directors consisting of 13 members, one of which is an independent director. The board of directors has established an audit committee, a strategy committee, and a remuneration committee. Board members have extensive industry experience. The degree of process regulation is low, in particular, there is no formalized risk management policy or dividend policy. The structure of the Group is complicated, which is largely explained by the Company's geography of operations covering multiple jurisdictions and the specifics of its business. The Company does not publish its financial and operating performance indicators, though it prepares consolidated IFRS financial statements audited by PwC.

Key assumptions

  • The average annual increase in the price of products equal to the inflation rate in 2020–2022, while maintaining or a slight increase (+5–10%) in the production volume;
  • Reduction in capital expenses starting from 2022;
  • Preservation of the current geography of business;
  • No dividend payouts and a negative FCF;
  • Maintaining access to external sources of liquidity.

Potential outlook or rating change factors

The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.

A positive rating action may be prompted by:

  • A decline in the weighted average ratio of total debt to FFO before interest charges below 1.0x and a growth in the weighted average ratio of FFO before net interest charges to interest charges above 8.0х;
  • An increase in the FCF margin above 10%;
  • Better access to liquidity sources;
  • A significant improvement in the corporate governance practices.

A negative rating action may be prompted by:

  • A growth in the weighted average ratio of total debt to FFO before interest charges above 2.0x
  • A decline in the weighted average ratio of FFO before net interest charges to interest charges below 5.0х
  • A decline in the FFO margin before interest charges and taxes below 8%;
  • Dividend payouts and a negative FCF;
  • Worse access to liquidity sources.

Rating components

Standalone creditworthiness assessment (SCA): a-.

Adjustments: none.

Issue ratings

No outstanding issues have been rated.

Regulatory disclosure

The credit rating has been assigned under the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Non-Financial Corporations under the National Scale for the Russian Federation, and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities.

A credit rating has been assigned to Rissa Investments Limited for the first time. The credit rating and its outlook are expected to be revised within one year following the publication date of this press release.

The credit rating was assigned based on the data provided by Rissa Investments Limited, information from publicly available sources, as well as ACRA’s own databases. The credit rating and the expected credit rating are solicited, and Rissa Investments Limited participated in their assignment.

No material discrepancies between the provided data and the data officially disclosed by Rissa Investments Limited in its financial statements have been discovered.

ACRA provided no additional services to Rissa Investments Limited. No conflicts of interest were discovered in the course of the rating process.

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