26.11.2008 - MDM Comment: Color, ALROSA, HCFB, VIP, GMKNRU

Russian equities and Eurobonds are today paring some of the gains garnered earlier in the week as risk appetite is weakening. Local bonds are flat and barely liquid. The ruble is stable against the basket (30.95-31.00). Interestingly, yesterday and Monday the Central Bank of Russia managed to avoid spending more reserves – a result of a combination of a shortfall of ruble liquidity and dollar weakness in the global markets. Apparently today some reserves will be spent – banks have received some cash from the Central Bank (Monday and Tuesday auction cash proceeds) part of which may likely be channelled into foreign currency.

Below are our key stories and comments for today:

1. S&P cut ALROSA’s rating one notch to BB- and maintained it on CreditWatch Negative. The rating agency lists as key credit concerns the company’s deteriorating financials and operating environment, as well as ALROSA’s involvement, in partnership with Russian Railways, in the bailout of KIT Finance bank. Apparently S&P already obtained ALROSA’s 1H08 numbers, since it refers to a lower EBITDA margin during the period, as well as substantially higher debt (RUB108 bn vs. RUB82 bn at 2007FYE). According to our estimates, ALROSA’s debt/EBITDA ratio has soared to approximately 4X from 2.5X in 2007.

We also have a moderately negative outlook on a stand-alone credit profile of ALROSA. While the federalization story is over, ALROSA is facing much higher capex needs as it is forced to move to expensive underground mines. At the same time, the pricing environment for diamonds is deteriorating as the developed world is sliding into a recession. Not so long ago ALROSA said that it may cut production in order to prevent a sharp decline in diamond prices.

We believe, however, that S&P could have been more generous when factoring in government support in ALROSA’s rating (now only a 1 notch uplift). In our view, the company is well positioned to be at the front of the queue for help from state banks should it face financial distress.

2. VimpelCom (Ba2/BB+) reported solid 9m08 numbers. Company revenues for the three quarters of this year reached USD7.6 bn, while EBITDA totalled USD3.7 bn and net debt as of the reporting date stood at USD7.2 bn. VimpelCom’s management announced a severe cut in its investment appetite, that it is hedging of FX exposure, and named debt repayment a top priority of the financial policy. We are quietly confident in VimpelCom from a credit perspective given the company’s manageable leverage levels, relatively smooth debt maturity profile (over 75% of debt is long-term) and the sustainability of the business against the economic downturn (elasticity of demand for telecom services is not high).

3. HCFB’s (Ba3/B+) key manager Ivan Svitek speaks to Vedomosti. Mr. Svitek said in his interview with the Russian business daily that the bank is now focusing entirely on short-term products (POS loans, credit cards, cash loans) and has halted the issuance of car loans and mortgages. He also said that HCFB is now spending a great deal of time improving and tightening its risk management. In a separate article, Vedomosti writes that HCFB’s parent company – PPF Group – is planning to set up a multi-billion euro fund together with its partner Generali. In our view, the liquidity position provided by PPF is one of key uncertain variables in the HCFB credit analysis exercise, as the bank relies heavily on PPF support. PPF recently invested in a number of large projects in Russia apart from HCFB, which included equity stakes in Ingosstakh, NOMOS Bank and Polymetal, as well as hybrid financing for Eldorado retail chain.

4. Also you of course heard that the state has managed to reach ‘peace’ in the Norilsk Nickel (Baa2/BBB-) shareholder conflict. For those who felt nervous when mutual accusations among RUSAL and Interros took place, this is perhaps good news. We think that the conflict didn’t impair the company’s fundamentals to any significant extent (except for the USD2 bn share buyback, which reportedly will be fully executed) and NorNickel remains a very solid credit with enough room in margins and leverage ratios. GMKNRU 09 issue has been a popular one recently.

26.11.2008 15:42