Standard & Poor’s Ratings Services has reinstated its long-term corporate credit rating on
Russian diamond miner ALROSA Co. Ltd. (Alrosa) at ‘B+’ and the short-term rating at ‘B’. Standard & Poor’s suspended the ratings on April 7, 2009. The outlook is positive. The reinstatement follows Standard & Poor’s receipt of sufficient financial and operating data on Alrosa to surveil the company and assess ratings.
Standard & Poor’s also reinstated our ‘B+’ rating on Alrosa’s $500 million Eurobond and ‘B’
short-term rating on Alrosa’s commercial paper program. The ’4′ recovery ratings on the Eurobond was also reinstated. The Eurobond and commercial paper program are issued by ALROSA Finance S.A. and guaranteed by Alrosa.
“The ‘B+’ long-term rating is based on Alrosa’s stand-alone credit profile, which we assesses at ‘CCC+’, as well as on our opinion that there is a “high” likelihood that the government of the Russian Federation (foreign currency BBB/Stable/A-3, local currency BBB+/Stable/A-2; Russia national scale ‘ruAAA’) would provide timely and sufficient extraordinary support to Alrosa in the event of financial distress,” said Standard & Poor’s credit analyst Andrey Nikolaev.
Our view of a “high” likelihood of extraordinary government support is based on Standard & Poor’s assessment of Alrosa’s:
“Important” role for the Russian economy, reflecting its monopoly position in diamond mining in Russia and its status as the largest employer and taxpayer in Yakutia (the Republic of Sakha {BB-/Negative/–; Russia national scale ‘ruAA-’}), which, together with local governments, controls 40% of the company.
“Very strong” link with the Russian Federal government, its 50.02% shareholder, which controls its strategy and operations. Our assessment of the link with the government is also based on senior government officials’ high degree of involvement–including that of Russian Deputy Prime Minister and Finance Minister Alexei Kudrin as the company’s chairman in Alrosa’s strategic decision-making.
Our assessment of the likelihood of timely and sufficient extraordinary government support is further underpinned by support provided in 2008-2009 through substantial loans from state-owned JSC VTB Bank (BBB/Negative/A-3; Russia national scale ‘ruAAA’) and Alrosa being able to sell its diamonds to the State Diamond And Precious Metals Reserve (Gokhran).
Standard & Poor’s view of a ‘CCC+’ stand-alone credit profile is based on our assessment of Alrosa’s business risk profile as “weak” and its financial risk profile as “highly leveraged”.
Alrosa’s business risk profile is constrained by the commodity-type nature and capital-intensiveness of the diamond-mining industry. Business risk is further constrained by the harsh operating conditions in Yakutia.
Alrosa’s business risk profile is supported by the diamond-mining industry’s concentrated structure, where the two largest players control about 70% of the world market. Alrosa’s key competitive advantage is a substantial and high-quality reserve base. The company enjoys a 25% global market share and a near monopoly in Russia.
Alrosa’s financial risk profile is pressured by “very weak” liquidity in Standard & Poor’s view and a highly leveraged capital structure.
Alrosa was able to substantially decrease debt in the second half of 2009, and Standard & Poor’s anticipate that the company should be able to generate neutral or positive free operating cash flow in 2010-2011.
“The positive outlook reflects the possibility of an upgrade in the next six to 12 months, if Alrosa is able to meaningfully improve its liquidity through long-term debt issuance and if diamond-market conditions remain stable,” said Mr. Nikolaev.
For the rating upside to materialize, Standard & Poor’s would expect the company to generate at least neutral free operating cash flow in 2010 and gradually deleverage.
Should the company be unable to access the capital markets as planned, or if its cash flows decline materially in 2010, Standard & Poor’s might lower the ratings.
Ratings downside could also appear, if the currently “very strong” link with the government weakens.
Related posts:
- Russian Diamond Miner ALROSA Upgraded To ‘BB-’ On Improving Liquidity And Operating Performance
- Russia-Based Diamond Miner ALROSA Proposed Bond Rated ‘B+’ by Standard and Poor’s
- Diamond Miner Alrosa May Review Corporate Development Strategy Taking into Account Market Changes
- Russian Diamond Miner Alrosa’s USO Sees Increasing Demand for Rough Diamonds in 2010; To Diversify Geographical Operations
- Vasily Grabtsevich Appointed Vice President of Russian Diamond Miner Alrosa
