ACRA affirms BB+(RU) of ELDORADO LLC, and changes its status to “Rating under revision: positive”

The credit rating affirmation of ELDORADO LLC (hereinafter – Eldorado or the Company) at BB+(RU) and change of the Stable outlook to the status of “Rating under revision: positive” are based on a significant synergy effect from Eldorado and M.Video businesses, including ACRA’s positive expectations with regard to the Company’s debt profile. At the same time, high leverage, adequate business profile, low corporate governance level, moderate size and profitability are characteristic of Eldorado.

Eldorado is the third largest Russian multiproduct nationwide retailer in terms of sales  specializing in home appliances and consumer electronics sales, with a market share close to 10%. In late 2016, the Company was acquired by Safmar Group that also owns M.Video, the largest player in the market. As at end-2017, the Company’s retail chain totaled 415 stores.

Key rating assessment factors

High leverage of Eldorado is largely related to guarantees provided by Eldorado for the USD 350 mln loan raised by the parent company. As a result, its adjusted debt to FFO ratio before fixed charges ran into 8.1x as at December 31, 2017, according to the preliminary data. By ACRA estimates, FFO before fixed charges to fixed charges totaled 1.07x as at end-2017, which was sufficient to make interest and lease payments. ACRA expects the above ratio may equal 1.3-1.4x starting from 2018. The improvement would be possible by virtue of the synergy from Eldorado and M.Video businesses, which could drive Company’s transition to new product purchase terms as well as harmonization of advertising campaigns and coordinated communication with landlords. The Agency plans to revise Eldorado’s rating within the next 90 days based on updated credit profile data of the Company.

Moderate liquidity. At the time of rating analysis, Eldorado was in breach of leverage covenants under the loan that it acts as a guarantor in. However, we estimate that the Company’s leverage is very likely to return into the acceptable range in the short term owing to financial indicators improvement. In addition, transitioning to a new settlement procedure with suppliers would contribute to working capital release, which would also support liquidity. It is worth noting though, that Eldorado’s debt primarily comprises short-term liabilities, and the Company has no substantial liquidity reserves, which forces it to continuously negotiate current debt refinancing with banks. This, in turn, puts pressure on the liquidity.

Adequate business profile and wide geographic footprint are determined by Eldorado’s strong brand and its efficient promotion. The Company has fairly balanced presence in all federal districts of Russia. Existence of the online sales segment that is being actively developed increases diversification of formats used by the Company.

Low corporate governance level. Weak formalization of the development strategy and lack of a regulated risk management process may lower the management quality in the Company. At the same time, ACRA notes that establishment of the board of directors in the Company has been completed. Further development of this management body by improving its regulation level, among other things, could have a positive effect for the rating.

Moderate size and profitability. The FFO margin before fixed charges and taxes reached 8%. ACRA expects the profitability indicators to gradually improve in 2018-2020 by virtue of higher operational efficiency of the Company driven by the new procedure for settlements with suppliers.

Revenues and FFO before fixed charges of Eldorado correspond to the Company’s medium size.

Key assumptions

  • The chain growing by 10–20 stores per year on average;
  • Average exchange USD rate within RUB 60–70;
  • No dividend payout in addition to servicing the loan provided by OOO Safmar Retail.

Potential outlook or rating change factors

A positive rating action may be prompted by:

  • Material debt load decline;
  • Liquidity profile improvement;
  • Material corporate governance improvement.

A negative rating action may be prompted by:

  • Creditors’ decision to accelerate repayment of the loan with respect to which the covenants have been breached;
  • Significantly impaired access to external liquidity sources;
  • Debt load growth, or tightening loan agreement terms;
  • Average USD exchange rate growth to RUB 75;
  • Dividend payout in addition to servicing the loan provided by OOO Safmar Retail.

The removal of the “Rating under revision” status may be prompted by:

  • A substantial change of the Company’s debt profile.

Rating components

Standalone creditworthiness assessment (SCA): bb+

Adjustments: none.

Issue ratings

The company has no securities issues outstanding.

Regulatory disclosure

The credit rating and its status have been assigned under the national scale for the Russian Federation and are 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.

The credit rating of ELDORADO LLC was published by ACRA on March 7, 2017 for the first time. The credit rating is expected to be revised within 90 days following the rating action date (February 27, 2018).

The assigned credit rating and its status are based on the data provided by ELDORADO LLC, information from publicly available sources, as well as ACRA’s own databases. The credit rating is solicited, and ELDORADO LLC participated in its assignment.

No material discrepancies between the provided data and the data officially disclosed by ELDORADO LLC in its financial statements have been discovered.

ACRA provided no additional services to ELDORADO LLC. No conflicts of interest were discovered in the course of credit rating assignment.

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