Standard & Poor's Ratings Services said that it had raised its long-term corporate credit rating on Russian diamond miner ALROSA Co. Ltd. (ALROSA) to 'BB-' from 'B+'. The 'B' short-term corporate credit rating was affirmed. The outlook is stable.
At the same time, the rating agency says, we assigned an issue rating of 'BB-' and a recovery rating of '4' to the proposed notes of at least, but not substantially more than, $1 billion to be issued by ALROSA Finance S.A. The recovery rating of '4' indicates our expectation of average (30%-50%) recovery in the event of a payment default. We anticipate that the proceeds of the new issue will be used to refinance debt maturities due in 2010. The proposed notes are unsecured and guaranteed by ALROSA, the main operating company of the group and the borrower of most of the group's debt.
We also raised the issue ratings on ALROSA's other debt facilities to 'BB-'. The recovery ratings on those facilities remain unchanged.
"The upgrade reflects the combination of ALROSA's improved stand-alone credit profile to 'b', and the revision of our assessment of the likelihood of extraordinary government support to "moderately high"," said Standard & Poor's credit analyst Andrey Nikolaev.
We raised our assessment of ALROSA's stand-alone credit profile because improved diamond market conditions in 2010 enabled the company to increase its profits and cash flows substantially.
We now see the likelihood of extraordinary government support for ALROSA as "moderately high", and, to arrive at our overall corporate credit rating, we add two notches to the stand-alone credit profile. This is based on our assessment of ALROSA's: "limited importance" for the Russian economy and "very strong" link with the Russian federal government, its 50.02% shareholder, which controls its strategy and operations.
The stable outlook reflects our view that ALROSA will be able to refinance its short-term maturities with either the proceeds of the proposed bond or financing from JSC VTB Bank (BBB/Stable/A-3; Russia national scale 'ruAAA'). It also reflects our expectation that the company will be able to maintain its debt-to-EBITDA ratio at 3x to 4x.
We could lower the ratings if ALROSA was unable to access the capital markets or bank financing and improve its maturity profile. Pressure on the rating might build if we perceive that the government's influence on the company's strategy and operations weakens, so that the likelihood of support is no longer consistent with "moderately high", which we don't expect, however.
"Ratings upside could result in the near to medium term if the company is able to consistently generate positive FOCF and reduce leverage," said Mr. Nikolaev.
