The vast majority of non-Russian Europe, the Middle East and Africa (EMEA) corporate ratings would be unaffected by sanctions against Russia, says Fitch Ratings.
However, the credit ratings agency (CRA) does identify four Fitch-rated non-Russian issuers most at risk: Carlsberg Breweries, Atrium European Real Estate, Metro AG and Uranium One.
Fitch believes most companies would find ways to mitigate even the worse-case scenario of a complete halt in their Russian sales and cash flows should the Ukraine crisis result in wide-ranging measures. They could, for instance, cut dividends and capital expenditure (capex), forgo mergers and acquisitions (M&A) or conserve cash.
Less severe effects, such as higher funding and energy costs, could be weathered in the short-term. However, pressure on credit metrics would rise if political tension persists.
Most vulnerable are the handful of corporates that generate a significant proportion of their revenue or operating profit in Russia.
Danish brewing group Carlsberg, rated BBB/stable, generates around 20% of its revenue in Russia. Should Carlsberg permanently lose its Russian unit, which Fitch understands to be effectively debt-free, gross funds from operations (FFO) leverage would increase by up to 1.5x. The overall profile would also deteriorate due to lower diversification and fewer resources for growth, potentially leading to a one-notch downgrade.
The contribution to Carlsberg’s consolidated cash flow from Russian operations is also substantial (Fitch estimates it at more than 30% in 2013), although the loss would be partly mitigated by the increasing importance of Asia and the resilience of profits in Western Europe. In a less severe scenario, where the government weakened management’s ability to control strategy, Carlsberg could find it harder to tackle the many challenges in the Russian beer sector. The CRA adds that it takes comfort from the group’s track record of adjusting to adversities in the country and a step-up in these challenges should be manageable at the current rating.
Real estate group Atrium’s (BBB-/stable) exposure to Russia represents 28% of net rental income and 19% of its total asset portfolio by value, but only seven out of 153 properties. Nonetheless given its low leverage, a downgrade would be unlikely even in an extreme scenario. Fitch believes Atrium’s balance sheet management factors in the inherent level of risk in the region.
German retail and wholesale group Metro’s (BBB-/stable) revenue exposure to Russia is estimated at below 7%. Stripping out Russian operating profits, and assuming Metro would not pay its Russian leases under this scenario, Fitch estimates FFO net leverage could rise by 0.3x-0.4x to around 4.7x.
This is still below the CRA’s guideline for BBB- of below 5x. If the planned initial public offering (IPO) of 25% of Metro Cash and Carry (MCC) Russia were cancelled, leverage would probably only rise 0.1x-0.2x, as the reduction in debt would be partially offset by the loss of earnings before interest, tax, depreciation and amortisation (EBITDA) on any disposal. It would however slow MCC’s expansion as the proceeds are earmarked for re-investment in fast-growing countries.
Canada-based Uranium One (BB-/Stable) generates roughly 40% of its revenue in Russia through off-take agreements with its ultimate parent, state-owned Rosatom, to supply up to 51% of its marketable production at spot prices. This includes up to 100% of attributable production from its Kazakhstan mines.
Losing the Russian cash flows would be detrimental, especially with uranium prices near multi-year lows. However, this is not Fitch’s base-case scenario as the strong political commitment to peaceful nuclear cooperation between Russia and Kazakhstan implicitly covers Uranium One’s Kazakh operations.
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