October 10, 2006 | Cbonds
|Standard & Poor's Ratings Services said today it placed its 'BB-' long-term corporate credit rating on Russia-based vertically integrated aluminum company Sual International Ltd. on CreditWatch with positive implications. This follows today's announcement about a proposed merger between Sual and Rusal (not rated), Russia’s largest and the world's third-largest aluminum company, that would also incorporate the alumina assets of Switzerland-based trading group Glencore International AG (BBB-/Stable/A-3).|
The ratings on Glencore remains unchanged, as the alumina assets it intends to contribute to the transaction represent less than 10% of the book and market value of Glencore’s industrial assets. In addition, dividends from the new group are expected to offset the reduction in related cash flows from the assets.
Under the terms of the share-for-share deal, Rusal’s shareholders will own 66% of the new group, with Sual’s shareholders owning 22% and Glencore 12%, respectively.
"The CreditWatch placement on Sual reflects that the ratings could be raised if the merger goes ahead," said Standard & Poor's credit analyst Elena Anankina. "The combined group would enjoy a significantly stronger business profile than the three units on a stand-alone basis."
The new group would be the world's largest aluminum and alumina producer with a diversified production base. Its annual production would be about 4 million tons of aluminum and 11 million tons of alumina (compared with actual Sual’s 1.0 million tons of aluminum and 2.3 million tons of alumina), corresponding to about 12.5% and 16.0% of global aluminum and alumina production, respectively. It would enjoy a competitive cost position, supported by vertical integration and access to cheap hydropower in Russia, and would benefit from potential operational synergies.
The CreditWatch resolution is subject to the transaction being completed. If the merger is successful, the combined entity's business profile will benefit from increased size and diversification.
"Any upward rating movement for Sual will be largely driven by the new group’s financial policy, financial profile, and governance practices," Ms. Anankina added. "A substantial increase in leverage could, however, limit rating upside."
Financial factors are difficult to estimate because Rusal, the largest merger participant (66% interest) and a private company, does not disclose its financials. We also note that Rusal, in particular, has been active in acquisitions, and we believe the combined group may have significant ambitions to grow through acquisitions and new projects. Furthermore, important aspects of the transaction remain unclear, in particular:
-- Whether there will be any merger-related distributions to shareholders or any cash payments to include specific assets in the transaction;
-- The relative status of Sual’s creditors in relation to other creditors of the group;
-- Financial policy targets in areas such as debt, off-balance-sheet financing, dividends, acquisitions, and capital expenditures.
We will also monitor progress in corporate governance and transparency, as the combined group intends to undertake an IPO within three years if the transaction is successful.
|Full company name||open joint stock company SUAL|
|Country of risk||Russia|
|Country of registration||Russia|