SPECIAL REPORT: Investment Needs, Tight Liquidity May Dim Russian Food Retailers' Bright Future, Says S&P

MOSCOW ---Russia's food retail sector is booming, but the need for significant investment in infrastructure, high debt burdens, and tight liquidity threaten to dampen this stellar performance, according to a new Standard & Poor's Ratings Services' report titled "Significant Investment Needs And Tight Liquidity May Dim Russian Food Retailers' Bright Future."

(St. Basile Spasskaya Tower in Red Square, Moscow, top left)

The retail food market grew more than 15% net of inflation in 2007, while retail spending per capita in Russia is still between one-half and one-third that of developed markets, indicating the potential for future growth.

However, underdeveloped logistics, such as a lack of transportation and warehouse facilities as well as the limited availability of commercial real estate will require heavy investment from retailers operating in Russia.

"This deficiency translates into a long-standing need for external capital from sources varying from equity to debt, from bilateral bank loans and private equity placements to public bond issues and IPOs on local and international stock exchanges," said Standard & Poor's credit analyst Anton Geyze.

The retail sector has amassed a high debt burden as aggressive sector growth continues and companies require equity injections on a regular basis to keep financial policies manageable.

(Entrance to Kremlin Senate, middle right photo)

Consequently, companies with strong parental support in the form of either large multinational food retailers or local investment holdings enjoy better financial flexibility. However, Standard & Poor's does not always factor parental support to a full extent into the ratings, because in some cases this is difficult to quantify and far from certain.

Despite generally bright industry prospects, a downturn in the retailers' operating performances or financial market disruption may undermine support from investors and prevent companies from rolling over significant short-term debt.

(Russia's own White House complex, seat of Russia's government, middle left photo)

The report points to a series of recent defaults by Russian midsize food retailers, which serve as a vivid reminder of the risks that exist in the sector, and concludes that liquidity management practices are becoming a key factor for companies' credit quality.

(Typical Russian petrol (natural gas) station, lower right photo)

Overall, the credit quality of Russia's largest food retailers if viewed on a stand-alone basis falls mostly in the 'B' rating category, a level at which we expect companies to remain in the short to medium term unless their liquidity positions deteriorate.

The article is part of a special report titled "Ten Years After Default, New Risks Emerge For A Resurgent Russia," in the Sept. 17 issue of CreditWeek, Standard & Poor's weekly magazine on credit risk.

Media Contact:

David Wargin, New York, (1) 212-438-1579, david_wargin@standardandpoors.com

Analyst Contacts:
Anton Geyze, Moscow (7) 495-783-4134
Nicolas Baudouin, Paris (33) 1-4420-6672
Industrial Ratings Europe