S&P upgrades Russian cosmetics producer and distributor Concern Kalina to AA+ from A+ on acquisition by Unilever; rating withdrawn at company's request
January 23, 2012
– Standard & Poor's Ratings Services said today that it had raised its Russia national scale credit rating on cosmetics producer and distributor Concern Kalina (JSC) to 'ruAA+' from 'ruA+'. We then removed the rating from CreditWatch, where it was placed with positive implications on Oct. 18, 2010. Subsequently, we withdrew the rating at the issuer's request.
The rating on Kalina reflected our analysis of the company's stand-alone credit profile and implicit support from Unilever PLC (A+/Stable/A-1). This assessment reflects Unilever's majority ownership of Kalina, Kalina's importance to Unilever given the latter's focus on emerging markets, and Unilever's significant investment in Kalina, which equals Russian ruble (RUB) 17.4 billion (€420 million) compared with Kalina's external debt of about RUB3.5 billion (€85 million) of. Applying our corporate criteria, we believe that economic incentive is the most important factor on which to base our judgment about the degree of linkage between Unilever and Kalina.
We understand that Unilever has provided no unconditional guarantees for any future debt issuance by Kalina. We therefore did not equalize the rating on Kalina with that on Unilever. We understand that Unilever has provided an internal loan to Kalina to refinance its existing debt. Our assessment of parental support from Unilever was limited by Russian country risk and we considered a three-notch uplift appropriate.
The upgrade followed a recent announcement by Unilever that it acquired an 82% interest in Kalina for RUB17.4 billion from key shareholders, after receiving required approval from the Russian and Ukrainian governments.
On Jan. 10, 2012, Unilever made an offer to acquire the remaining shares of Kalina. We expect the offer to remain open for 80 days.
We do not expect Kalina's leverage to materially increase as we believe Unilever will continue pursuing its historical financial policy with the help of positive free cash flow generation and revenue growth.
The rating on Kalina was constrained by competition in Russia's cosmetics and personal-care industry and the company's modest geographic diversity and limited scale compared with the scale of its international peers. We consider that additional risks stem from Kalina's less-than-adequate liquidity, foreign currency exposure, limited financial flexibility, and thin free operating cash flow.
Somewhat offsetting these risks, in our view, are Kalina's resilient business model, fair profitability, and ability to maintain strong market shares in key business segments.