X5 is aggressively pursuing debt-financed acquisitions

The Standard & Poor’s ratings agency assigned a “BB-” long-term corporate credit rating to the X5 Retail Group, which operates the biggest grocery retail chain in Russia. The company was also placed on the agency’s CreditWatch list with negative implications. Once the review of X5’s profile is complete, Standard & Poor’s could either reaffirm the existing rating or lower it.

The rating agency also assigned a “B-” long-term corporate rating and a “ruBBB” Russia national scale rating to the discount food store Kopeyka. Kopeyka was similarly placed on CreditWatch, but with positive implications. Thus, the company’s rating could either be affirmed or go up following the completion of the review process. 

The placement of the two companies on CreditWatch happened after the announcement of X5 that it intends to acquire Kopeyka. The agency noted that placing the companies on the CreditWatch list indicates that Standard & Poor’s lacks certainty as to the effects of X5’s takeover of Kopeyka. 

If the transaction does go forward, Standard & Poor’s would either lower or maintain at current level the rating for X5, taking due regard for the company’s financial policy, liquidity, capital expenditures, leverage, as well as potential later acquisitions and mergers. Under Standard & Poor’s analysis, the debt load that X5 would have to assume if the transaction is consummated is going to undermine important credit indicators and take these metrics to a level below Standard & Poor’s current expectations. The agency is also concerned that the resulting commercial entity could have liquidity problems. The final decision of Standard & Poor’s will rest on the ability of X5 to deleverage quickly, as well as on the company’s management of liquid assets.  

Standard & Poor’s will also either affirm or raise its current rating for Kopeyka, taking into consideration the specifics of the relationship between the would-be parent and the subsidiary. According to Standard & Poor’s, the criterion of economic advantages and incentives presents the best starting point for analyzing the link between X5 and Kopeyka.

The rating of X5 is low because of the company’s rapid expansionist strategies, its existing financial policy, inadequate liquidity, its operations in difficult macroeconomic conditions, and its vulnerability to currency fluctuations. 

At the same time, the risks are counterbalances by X5’s ranking as the largest grocery retail supplier on the Russian market. The company also operates a diverse chain of stores, and implements effective cost-control measures. The group also can count on the support of its owner, the giant industrial and financial company Alfa Group.  

Kopeyka’s ratings demonstrate that Standard & Poor’s is concerned with the retail chain’s inadequate liquidity, the high degree of leverage, as well as its small volume of cash flow. Standard & Poor’s also took note of Kopeyka’s lack of transparent governance, although the rating agency did specify that the management culture was changing for the better.

Standard & Poor’s anticipates that the situation surrounding the placement of X5 and Kopeyka on the Credit Watch list will be resolved in a three-month timeframe. Representatives of the rating agency will meet with the executives from both companies and talk about their financial policies in the run up to the possible merger.