Rationale
On June 6, 2007, Standard & Poor's Ratings Services assigned its 'B-' long-term corporate credit and 'ruBBB' Russia national scale ratings to Belize-domiciled holding company Brand Development Inc., which operates under the name of its subsidiary, Sunway Group, Russia's largest fresh produce distributor. The outlook is stable.
The ratings are constrained by the group's exposure to the commodity-based fresh produce industry, which is compounded by its limited size, lack of geographic diversification, heavily leveraged financial profile, and weak liquidity. These risks are moderated by sound growth potential in Russia's fruit market and Sunway's leading market share, diversified product range, increasing profitability, and rising proportion of sales to retail chains.
Sunway's focus on the highly volatile commodity-based fruit import segment, particularly banana imports, exposes the group to a large number of external risk factors that are largely beyond its control. These include
supply and price volatility due to weather, political, and other risks, and changes in the global competitive nvironment. These risks are further exacerbated by the group's limited scale. Almost all of Sunway's imports and
distribution are concentrated in Russia, adding to the group's vulnerability and making it depend on swings in local market supply and demand. Relationships with long-term suppliers and retail chains somewhat mitigate this dependency.
On the back of aggressive expansion, persistent working-capital financing needs, and negative free cash flow generation, the group has accumulated very high debt, which compromises its short-term liquidity and financial flexibility. Sunway's lease-adjusted debt, totaling $170 million, exceeded annualized EBITDA 3.5x for the second half of 2006. EBITDA interest coverage was 2.5x, and operating cash flow was nearly zero for the same period, after having remained negative for a number of consecutive years, due mostly to huge working-capital outlays.
Sunway benefits from the positive dynamics of Russia's fresh produce market. Significant remaining growth potential is reflected in rapidly increasing average fruit consumption rates, which nevertheless considerably
lag average European levels. The group achieved market leadership in 2006, when its sales grew by 67% and reached $400 million, bypassing the previous leader, JFC Group Co. Ltd. (CJSC) (B-/Stable/--; Russia national scale 'ruBBB-').
Sunway is pursuing a product diversification policy, which has already resulted in fruit and vegetables other than bananas and citrus fruits contributing more than one-third of the group's total sales. Profitability has also shown a continuous rising trend, supported by increasing economies of scale and investments in the group's Ecuador-based production and Russia-based distribution.
Liquidity
Sunway's liquidity is weak, with debt dominated by short-term maturities, taking into account put options exercisable in 2007 on two outstanding bond issues: a Russian ruble (RUR) 1 billion ($38 million) issue maturing in 2008, and a $50 million credit-linked notes issue maturing in 2009. Short-term debt, including these two issues, was $139 million at year-end 2006, with $6 million in available cash and $18 million in committed bank facilities. Weak liquidity is exacerbated further by continuous negative free cash flow and ongoing dependence on external funds for refinancing and implementing a growth-oriented capital-investment program, although the latter is mostly discretionary in nature. Sunway plans to improve its debt maturity profile by refinancing its short-term bank loans with a new domestic four-year RUR1.5 billion issue in the second half of 2007.
Outlook
The stable outlook reflects our expectation that Sunway will maintain its focus on managing its financial risk exposure and actively developing its production to boost profitability. Given the group's substantial debt leverage
and constrained liquidity position, we expect Sunway to carefully manage its capital spending and working capital, and at the same time enhance operating profitability.
The outlook could be revised to positive if Sunway improves its limited liquidity position and increases financial flexibility by improving its debt maturity profile, while keeping the relative debt burden below the current level. Conversely, a lack of continuing improvement in or further deterioration of its poor financial flexibility and modest credit protection measures could lead to a downgrade or the outlook being revised to negative.
Ratings List
Corporate credit rating B-/Stable/--
Russia national scale rating ruBBB
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