RG Brands LLP (Kazakhstan): brief description of risks

/IRBIS, Feb 7, 01/ - Following is brief characteristics of RG BRAND LLP (Almaty) published in connection with bonds of second emission (KZ72KAT51A39, RGBRb2, $100, $4 mln, Jan.08, 01-Jan.08,03, semiannual coupon - 13% APR). The presented information was compiled by analysts of KASE on basis of documents RG BRANDS and other authorized entities submitted to the Exchange. They included documents prepared for admission of company's bonds into listing "A". Results of analysis also presented in conclusion of the listing commission as Appendix. Appendix of listing commission - particular aspects of company's activity that could be interesting for potential investors. The description is a one of the news-blocks published by IRBIS in connection of second emission of bonds. IRBIS agency notes that presented information have been largely quoted from the conclusion of KASE listing commission. IRBIS analysts have made only editorial corrections. DEPENDENCE ON INCOME LEVEL RG BRAND's production is in high demand among the population. At the same time, it is highly dependent from income level of population. Demand significantly lowers when economy stagnates. The management of company noted that RG BRAND had remarkably increased its safety margin by lowering costs of production. The company is ready to cut prices if the economy will experience long-lasting stagnation. DEPENDENCE ON IMPORTS OF RAW MATERIALS RG BRANDS is clearly dependent from foreign suppliers. Share of import costs including transportation on concentrated products (Germany) amounts to 50%, packaging operations include 39% of imports from Sweden. Thus, the company largely depends on exchange rate fluctuations. ACCOUNTS RECEIVABLES In December 2000 RG BRANDS completed financial statements for 9 months 2000. Amount of accounts receivables reached KZT471.8 mln. The repayment term is fife years. Among debtors affiliated companies PRG Bottlers OJSC, Resmi Group LLP, Uni Commerce LLP. From January 21, 2001 RG BRANDS restructured its long-term receivables to short-term. As a result, debts to the company reached KZT590.2 mln. The company also informed that major amount of this sum KZT557 mln was redeemed on Jan.30. 2001. However, this information was not supported by official documents. OPERATIONS WITH AFFILIATED PARTIES The presence of large amount of affiliated debts and other receivables and payables among parties indicates that cash flows of the company might be distributed among other daughter parties of Resmi Group LLP. Thus, one should mark the possibility of cash outflows from RG BRANDS in case of unstable developments in the activity of the Resmi Group. This could also affect the company's ability to service its debt on bonds. ABILITY TO FULFILL OBLIGATIONS Funds raised from emission of bonds will finance working capital of the company. Thus, timely execution of debt commitments would depend on commercial expansion on the market. On the first stage of borrowing program the company might experience developing decease. This situation happens when a company has to lower profitability penetrating markets and expanding productions. Nevertheless, related losses will be probably compensated by interest rate differences between bank loans and bonds issue. At the same time, the company would have to find new financial sources or to cut production after redemption of bonds. CHANGES IN LEGISLATION On Jan.27, 2001 the Directorate of NSC ratified amendments (resolution #765) to the Securities Listing Regulation that were approved on the meeting of KASE members of categories "K", "P", "H" on Nov.08, 2000. New wording of the regulation included restriction for partnerships on inclusion of their securities into category "A". As the modification is to be enacted on Apr.01, 2001 RG BRANDS LLP accepts the risk of grade lowering.