S&P keeps Central European Distribution's CCC+ long-term corporate credit rating on CreditWatch negative after CEDC asks for waiver from note holders pertaining to timing of filing its Q2 financial statements
August 8, 2012
-- CEDC, the U.S.-based parent company of Polish vodka manufacturer CEDC International sp. z o.o., has announced that it is soliciting consent from the holders of its senior secured notes due 2016 to obtain a waiver with respect to the timing of the filing of its second-quarter financial statements.
-- The waiver might not be consented by the majority of the noteholders, which could trigger the acceleration of payment of the notes, if not remedied after 30 days, which would put significant pressure on the group's already weak liquidity.
-- We are keeping our 'CCC+' long-term corporate credit rating on CEDC on CreditWatch negative.
-- The CreditWatch indicates a possible downgrade by one or several notches if CEDC does not obtain the waiver from the noteholders, or if we perceive any other signs of deterioration in the group's liquidity.
On Aug. 8, 2012, Standard & Poor's Ratings Services kept on CreditWatch with negative implications its 'CCC+' long-term corporate credit rating on U.S.-based Central European Distribution Corp. (CEDC), the parent company of Poland-based vodka manufacturer CEDC International sp. z o.o. The 'CCC+' issue rating on CEDC's senior secured notes and 'CCC-' issue rating on the unsecured notes also remain on CreditWatch negative.
All ratings were originally placed on CreditWatch on June 8, 2012.
The CreditWatch status reflects our view that uncertainties remain related to CEDC's ongoing accounting review and that CEDC's liquidity could further and substantially weaken if there was a breach of covenants which could lead to the acceleration of the payment of the 2016 notes, upon receipt of a written notice of 25% or more of the noteholders.
CEDC has announced that the accounting review was still ongoing and that it might not be able to file its second-quarter results by Aug. 14, 2012, as requested by the SEC. We understand that this would constitute a breach of covenants, as per the documentation of the EUR430 million and $380 million 2016 notes, for which CEDC would have a 30-day remedy period.
Therefore, in exchange for a waiver fee, CEDC has asked for an extension of the SEC filing date to Nov. 12, 2012. The waiver requires consent from the majority of the noteholders, and the deadline for the consent is Aug. 10, 2012, but could be extended.
In our view, the potential upcoming breach of covenant and the still ongoing accounting review put further pressure on the group's rating and already weak liquidity position.
The outcome of the accounting review could be significantly higher than the preliminary indication of a $30 million-$40 million negative impact on group 2010 and 1011 EBITDA.
If the waiver is not consented, CEDC would be in breach of covenant, which could have a substantial impact on its liquidity if the 2016 notes (which have a cross-default with the $310 million convertible notes due 2013) were accelerated. Without access to external sources of liquidity, CEDC would most likely default.
However, we believe that CEDC is likely to obtain the covenant waiver, given the progression of its negotiation with Russian Standard Corporation (Russian Standard).
Russian Standard, owner of Russian Standard Vodka and Russian Standard bank, is now the majority owner of CEDC. CEDC and Russian Standard signed a final agreement on July 9, 2012, with regards to the refinancing of CEDC's $310 million convertible notes due 2013, also allowing for Russian Standard to increase its stake in CEDC. On the same day, CEDC's founder resigned from the CEO position, and Roustam Tariko, founder and owner of Russian Standard, became the non-executive chairman of the board of CEDC. At this stage, we view the agreement with Russian Standard as positive for CEDC, both from an operational point of view as CEDC could benefit from the stronger operations of Russian Standard vodka, and from a liquidity standpoint as Russian Standard is participating in CEDC's 2013 refinancing through a combination of equity injection, conversion of part of the notes, and a backstop facility for the remainder of the notes.
We continue to view CEDC's liquidity as "weak," under our criteria. But given the ongoing accounting review and potential upcoming covenant breach, we believe liquidity has weakened further.
Our "weak" assessment reflects the following factors:
-- Persistent deterioration in CEDC's performance and credit ratios in 2010, 2011, and the first quarter of 2012;
-- The absence of any particular core bank relationships;
-- Our view of CEDC's poor standing in credit markets, given its wide bond spreads and falling share price. The recent announcements on the restatements of the financial statements and waiver solicitation further restrict CEDC's access to capital markets, in our view; and
-- The upcoming March 2013 $310 million debt maturity (convertible bonds), which exceeds CEDC's sources of cash. Sources primarily consist of cash on the balance sheet ($108 million at the end of March 2012); we do not anticipate any internally generated free cash flow in 2012, and committed long-term lines are limited.
The refinancing of the $310 million convertible bonds is underway, backed by Russian Standard; an amended definitive agreement on the refinancing of the bonds was signed between CEDC and Russian Standard on July 9, 2012. However, we believe that some execution risks remain, primarily because of the accounting review and potential upcoming breach of covenants, which could endanger the 2013 refinancing.
Also, if CEDC breaches the covenant on the 2016 notes, this could trigger the acceleration of the 2016 notes (upon receipt of a written notice of 25% or more of the noteholders) as well as the 2013 convertible notes (cross-default). CEDC would need access to substantial external funds to address this.
Standard & Poor's aims to resolve or update the CreditWatch placement within the next three months. During this period, we expect to receive adequate and updated financial and operating information to conduct our analysis. We will monitor factors including the outcome of the waiver solicitation, the magnitude of the financial restatements, and the group's performance and liquidity.
We could lower the ratings by one or several notches if CEDC does not obtain a waiver for the filing covenant, if the accounting review concludes with restatements that would be higher than the current $30 million-$40 million impact on EBITDA estimated by CEDC, if we perceive further signs of weak corporate governance, or if we see further deterioration in the group's liquidity.
We could affirm the 'CCC+' rating if CEDC successfully files its quarterly financials, and if the restatements do not exceed current estimates. We will continue to monitor the 2013 refinancing risk, as we believe that some execution risks remain.
Related Criteria And Research
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- How Standard & Poor's Uses Its 'CCC' Rating, Dec. 12, 2008
-- Vodka Producer CEDC Downgraded To 'CCC+', On CreditWatch Negative On Restatement Of Financial Reports, June 8, 2012
Ratings Remain On CreditWatch
Central European Distribution Corp.
Corporate Credit Rating CCC+/Watch Neg/--
Senior Unsecured CCC-/Watch Neg
CEDC Finance Corporation International, Inc.
Senior Secured* CCC+/Watch Neg
*Guaranteed by Central European Distribution Corp.