TEXT-S&P summary: Yioula Glassworks S.A.

(The following statement was released by the rating agency)

Aug 06 -

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Summary analysis -- Yioula Glassworks S.A. ------------------------ 06-Aug-2012

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CREDIT RATING: CC/Negative/-- Country: Greece

Primary SIC: Glass containers

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Credit Rating History:

Local currency Foreign currency

19-Oct-2011 CC/-- CC/--

07-Oct-2011 SD/-- SD/--

23-Jun-2010 CCC+/-- CCC+/--

23-Jun-2009 B-/-- B-/--

04-Dec-2008 B/-- B/--

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Rationale

The ratings on Greece-based glass container manufacturer Yioula Glassworks S.A. (Yioula) reflect Standard & Poor's Ratings Services' classification of its business profile as "weak" and its financial risk profile as "highly leveraged."

In our opinion, the key ratings constraint is Yioula's "weak" liquidity, due to its low cash balance in combination with ongoing refinancing needs, which are dependent on external financing from strained financial markets in Greece. Furthermore, covenant breaches remain an ongoing liquidity risk, although lenders have waived breaches to date. As of March 31, 2011, Yioula reported total debt of EUR299 million.

Prospects for significant free operating cash flow (FOCF) generation remain limited due to heavy capital intensity, which exacerbates Yioula's dependence on external funding. The ratings are further constrained by Yioula's exposure to changes in volatile input prices, with pressure to pass on cost inflation to customers, and the heavy capital intensity inherent in the glass packaging sector.

We consider these weaknesses to be partly offset by Yioula's dominant positions in highly consolidated markets, its diversified customer base due to long-established relationships and a lack of alternative suppliers, and its robust operating profitability.

We understand that Yioula has extended its short-term borrowings, as well as several of its medium-term lines, on an amortizing basis. However, we believe that Yioula is likely to have further refinancing needs in the near term, as scheduled debt amortization payments become due and put further pressure on liquidity. Annual renewals of the group's short-term borrowings are due at the end of this year and the first quarter of 2013.

S&P base-case operating scenario

In our base-case scenario, we forecast a mid-single digit increase in Yioula's revenues in 2012, fueled by the group's continued expansion into new export markets in Western Europe. Yioula benefits from relatively stable demand in the food and beverage markets, but demand prospects remain uncertain, owing to the weak economic outlook for the Balkan region. The stability of revenues and earnings is further weakened by exposure to volatile and unhedged foreign currency movements, particularly in Romania and Ukraine, where hedging products are expensive or unavailable.

We expect Yioula's Standard & Poor's-adjusted EBITDA margin to remain steady in 2012, following a relatively robust performance in 2011. In the 12 months to March 31, 2012, Yioula's adjusted EBITDA margin held fairly steady at about 23%, compared with a peak of about 26% in full-year 2008. Profitability remains under pressure from increasing input costs, particularly for natural gas and electricity, and from regional expansion into areas where selling prices are lower and transportation costs higher than in the group's core markets.

Yioula's contracts do not include automatic price-adjustment clauses, although the company has a good track record of successfully renegotiating prices with its long-term customers, albeit with a time lag behind volatile costs. Earnings potential is likely to be constrained over the short term, and we anticipate weak demand in Yioula's core markets in the remainder of 2012, particularly in Greece, which accounted for about 22% of 2011 sales.

S&P base-case cash flow and capital-structure scenario

In 2011, Yioula reconstructed two of its furnaces and installed a new forming line, which increased capital expenditure (capex) to almost EUR47 million (about 1.6x depreciation). This resulted in negative FOCF of EUR10 million, compared with a small inflow in 2010. Management expects full-year 2012 capex to total between EUR20 million and EUR23 million, fueled by a furnace overhaul in Bulgaria planned for the fourth quarter of 2012, the financing for which is currently being negotiated. This leads us to anticipate an outflow of FOCF for the full year. In the full-year 2013, management plans to overhaul the furnace in Romania, at a cost of EUR17 million, although we understand that about 40% of this will be state subsidized.

Weak demand and liquidity constraints affecting Yioula's small to midsize customers remain a risk, in our view, with the likelihood of a recovery in the core Balkan market still highly uncertain. Without meaningful FOCF generation in 2012, Yioula remains dependent on external financing from strained financial markets in Greece.

In the rolling 12 months to March 31, 2012, Yioula's adjusted ratios of debt to EBITDA and funds from operations to debt remained at about 6x and 9%, respectively, levels that we assess as "highly leveraged." In our opinion, Yioula's credit metrics are likely to remain stable in the near term and are strong for the rating, in the absence of liquidity constraints. However, we view the group's liquidity profile as "weak," with added pressure from rising cash interest costs and possible working capital strains if the group's customers become distressed.

Liquidity

We assess Yioula's liquidity as "weak" under our criteria. This is due to the group's low cash balance and near-term refinancing needs, which depend on external funding from strained financial markets in Greece. Prospects for significant FOCF generation remain limited, in our view, due to Yioula's heavy capital intensity, which we believe exacerbates the group's dependence on external funding.

As of the end of March 2012, Yioula had almost EUR19 million of undrawn credit lines under short-term revolving credit facilities totaling EUR93 million, as well as cash of about EUR2 million. In our opinion, these sources of liquidity should be sufficient to meet short-term operating needs, provided that the group continues to successfully renew its credit lines. However, in our view, Yioula is likely to have further refinancing needs in the near term, as scheduled debt amortization payments become due across a number of banking lines and put further pressure on liquidity.

Yioula had difficulties in refinancing its EUR14 million loan from Piraeus Bank S.A. (Piraeus; CCC/Negative/C) last year. In our view, Yioula's failure to finalize longer-term refinancing on time has negative implications for future refinancing negotiations. Yioula faces about EUR12 million in debt amortization payments in the remainder of 2012 (as of March 31, 2012). In 2013, the group has about EUR50 million of debt maturities and will need to refinance its EUR28 million loan from EFG Eurobank Ergasias S.A. (CCC/Negative/C) and the EUR14 million Piraeus bank loan. The group also has EUR132.9 million of senior unsecured notes maturing in 2015. Documentation for some of the group's debt, including these notes, includes cross-acceleration clauses that are triggered by an event of default. We understand that a default under a bank loan would constitute an event of default in the absence of a waiver agreement. This could lead to further debt becoming immediately due for repayment.

We also note that covenant breaches remain an ongoing liquidity risk. That said, Yioula's lenders have waived potential breaches to date. We believe that Yioula's current liquidity issues may affect the lending banks' willingness to continue waiving potential breaches.

Outlook

The negative outlook reflects our view that further deterioration of Yioula's liquidity position is possible as a result of the group's near-term refinancing risk and dependence on external financing from strained Greek markets. Furthermore, Yioula faces an uncertain operating environment in its core markets over the near to medium term.

Yioula could default if it fails to make its debt amortization payments as they fall due, or if the lending banks stop waiving potential covenant breaches. Cross-acceleration clauses on some of the group's debt, including the senior unsecured notes, could trigger further debt becoming immediately due for repayment in an event of default.

We could consider revising the outlook to stable if Yioula were to improve its liquidity position and/or if it were to improve free cash flow generation and tackle its financial covenant risk.

Related Criteria And Research

All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.

-- Bulletin: Election Outcome Has No Immediate Effect On Greece Ratings, June 18, 2012

-- Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology And Assumptions, June 14, 2011

-- Issue Rating On Untendered Greek Bonds Raised To 'CCC', May 25, 2012

-- Hellenic Republic, May 24, 2011

-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009

-- How Standard & Poor's Uses Its 'CCC' Rating, Dec. 12, 2008

-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008