The credit rating of Vita Line LLC (hereinafter, Vita Line, or the Company) has been affirmed due to the Company keeping its credit metrics within the range established for the rating level. The rating is based on a strong business profile assessment, very low leverage, very high coverage, and a low assessment of the industry risk profile of the wholesale trade sector stemming from the fact that the Company is the main supplier in the non-formalized Vita Group (hereinafter, the Group). The rating is constrained by the size of the Company and its low corporate governance assessment.
Vita Line is the supplier in an informal group of one of the leading pharmacy chains in Russia. The Group sells its goods through pharmacies under the Vita Express, Vita Tsentralnaya, and Vita Online brands. As of June 30, 2022, the Group’s chain consisted of 2,270 pharmacies. The chain is geographically diversified in the central European part of Russia, and the main share of pharmacies is located in the Volga Federal District. The Company’s revenues amounted to RUB 41.5 bln in 2021 (+7.16% compared to 2020).
key assessment factors
The strong business profile assessment takes into account the low elasticity of demand in the Company’s key market — the retail market of medical drugs and related medical products. The Agency notes the high assessments of the quality of counterparties and settlement structure due to the fact that most transactions are performed via the pharmacies of the non-formalized Group. The Agency also notes that currently, the medical drugs segment is less exposed to the influence of sanctions, however, this situation may change in the future.
The small size of the Company and its high profitability stem from the low FFO before net interest payments and taxes in 2021, which, according to the Agency’s calculations, stood at RUB 4.1 bln. The Agency expects FFO before net interest payments to grow in 2022, mainly due to the period of intense demand for medical drugs in February and March (the Company’s revenues for Q1 2022 increased by 48.2% compared to the same period in 2021). Vita Line’s profitability is high, and ACRA does not expect it to decline significantly in 2022.
Very low leverage and very high interest payment coverage. In 2022, the Company bought back bonds of its BO-01 bond issue under a put option and kept the coupon rate of the issue at 11%. The Company’s use of long-term bonds has had a positive impact on its financial stability. Vita Line’s debt mainly consists of bond issues that the Company placed in during the low interest rate period of 2020–2021; this enables it to maintain sufficiently low debt service costs and has a positive impact on competitiveness. ACRA notes that in 2021, the ratio of long-term debt to FFO before fixed payments was 0.8x, while the ratio of short-term debt to revenues was around 0.1x. The ratio of FFO before net interest payments to interest payments exceeded 10.0x in 2021. The Agency expects the coverage indicator to decline in the future due to higher interest rates compared to those in 2020–2021.
Low corporate governance assessment. ACRA notes the absence of key management bodies, such as a board of directors, as well as the related committees, and policies and formalized procedures for making management decisions, which limits the Company’s rating. At the same time, the Agency takes into account the fact that the presence of all attributes and compliance with high standards of corporate governance are not always advisable for companies at this stage of development. ACRA neutrally assesses Vita Line’s development strategy in connection with the consistent development of its activities, and notes the rapid and successful expansion of the chain of pharmacies and work with suppliers. The group structure is assessed as medium due to the assignment of a rating to the Company, which is a separate legal entity within the Group, but key activities are carried out with affiliated legal entities. ACRA notes the low financial transparency assessment, which above all is related to the lack of consolidated IFRS reporting. However, the Agency was provided with combined IFRS financial statements of the Group for 2021. Risk management is assessed as medium. The Company has certain procedures to reduce financial and reputational risks when working with counterparties.
Medium liquidity assessment and high free cash flow (FCF) assessment. Vita Line has sufficient funds and credit limits to comfortably refinance its debt obligations and finance working capital, as well as capital expenditures, if necessary. The Company plans to pay dividends in the future while maintaining a conservative financial policy. Vita Line has recorded positive FCF profitability in the past.
Implementation of the Company’s plans for revenue and expansion of the chain in 2022–2024;
Conservative dividend policy that does not lead to higher leverage;
No changes in the market that complicate supplying and/or purchasing medical drugs.
potential outlook or rating change factors
The Stable outlook assumes that the rating will highly likely stay unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
Significant improvement of corporate governance practices;
Improved position in the Russian pharmacy chain market;
Formalization and consolidation of the Group on the basis of the Company.
A negative rating action may be prompted by:
Weighted ratio of long-term debt to FFO before fixed payments exceeding 1x;
Weighted ratio of FFO before net interest payments to interest payments falling below 8x;
Deterioration of the Company’s liquidity position and weighted FCF profitability falling below 5%;
Significant deterioration of the Group’s FFO margin before fixed payments coupled with deterioration of the structure of the Group’s balance sheet under combined IFRS reporting.
Standalone creditworthiness assessment (SCA): bbb+.
Support: ACRA assessed the combined reporting of the Group and decided to not apply any adjustments to the SCA.
No outstanding issues have been rated.
The credit rating has been assigned to Vita Line LLC under the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Non-Financial Corporations Under the National Scale for the Russian Federation, Methodology for Analyzing Rated Entities Associated with a State or a Group, and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities.
The credit rating of Vita Line LLC was published by ACRA for the first time on July 27, 2021. The credit rating and its outlook are expected to be revised within one year following the publication date of this press release.
The credit rating was assigned based on data provided by Vita Line LLC, information from publicly available sources, and ACRA’s own databases. The credit rating was assigned based on the RAS financial statements of Vita Line LLC. The credit rating is solicited, and Vita Line LLC participated in its assignment.
In assigning the credit rating, ACRA used only information, the quality and reliability of which were, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.
ACRA provided no additional services to Vita Line LLC. No conflicts of interest were discovered in the course of credit rating assignment.