At the same time, we lowered to 'CC' from 'CCC+' the issue
rating on the EUR215 million 9.00% secured amortizing bonds due
2021.
"The downgrade reflects the notice to bondholders that
SAZKA issued on Dec. 16, 2010, advising that it may only be
able to make a partial repayment of principal and interest due
on Jan. 12, 2011, on its EUR215 million bonds maturing 2021,"
said Standard & Poor's credit analyst Nicolas Baudouin.
As part of the same notice, SAZKA informed the bond trustee
that it has initiated negotiations with creditors with a view
to resolving this situation and restructuring existing
permitted debt.
"The downgrade further reflects the requirement for SAZKA
to reach an agreement with four of its senior creditors to
obtain a roll-over of short-term loans coming to maturity in
the last two weeks of the month of December 2010," said Mr.
Baudouin.
If one or several of these creditors were to refuse a
further extension of loans granted to SAZKA, this could create
a real risk of near term default, in our view.
We take the view that there is a materially higher
probability of default than before, unless SAZKA can
successfully secure a further extension of its unsecured bank
lines. We note that the group has been in discussions with its
unsecured creditors for over 12 months now, so far without
agreement on a more medium-term refinancing package.
We aim to resolve the CreditWatch placement once there is
clarity on the refinancing of SAZKA's short-term debt and the
payment of the Jan. 12, 2011, interest coupon and principal.
SAZKA's extremely stretched liquidity could trigger a
default in the very near future.
We could lower the ratings to 'D' (default) or 'SD'
(selective default) if SAZKA were to fail to meet any of its
obligations. We could also lower the corporate credit ratings
to 'D' upon a completion of a distressed exchange offer, which
under Standard & Poor's methodology means any offer
constituting less than the original promise without adequate
offsetting compensation.
We could take a positive rating action if SAZKA succeeds in
renewing its bank lines on a more medium-term basis and secures
the necessary funding to meet its immediate future obligations.
The ratings on SAZKA continue to reflect our view of the
company's extremely fragile liquidity and highly leveraged
financial profile, which results from its funding of the
construction of the O2 Arena, an 18,000-seat sports and
entertainment complex in Prague. The ratings are also
constrained by our view of the company's aggressive financial
policy and history of weak cash returns on capital investment.
Support for the ratings is provided by the sustainable,
cash-generative nature of SAZKA's well-established domestic
lottery business, which is covered by Czech lottery law. SAZKA
has a 94% share of the domestic lottery market, and more than
6% of the domestic gaming market. Still, the cash flows that
the operating activities generate are insufficient to cope with
the short-term maturities.
RELATED CRITERIA AND RESEARCH
All articles listed below are available on RatingsDirect on
the Global Credit Portal, unless otherwise stated.
-- Rating Implications Of Exchange Offers And Similar
Restructurings, Update, May 12, 2009
-- How Standard & Poor's Uses Its 'CCC' Rating, Dec. 12,
2008
