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Fitch Places MHP's Foreign-Currency IDR on Rating Watch Positive
May 4, 2017 / 11:14 AM / 6 months ago

Fitch Places MHP's Foreign-Currency IDR on Rating Watch Positive

(The following statement was released by the rating agency) MOSCOW, May 04 (Fitch) Fitch Ratings has placed MHP S.A.'s 'B-' Long-Term Foreign-Currency (FC) Issuer Default Rating (IDR) on Rating Watch Positive (RWP) and upgraded the Local-Currency (LC) IDR to 'B' from 'B-' upon the company's recent placement of a USD500 million Eurobond. The Outlook on the LC IDR is Stable. The agency has also assigned MHP's Eurobond a final rating of 'B-' and placed it on Rating Watch Positive. A full list of rating actions is detailed below. The RWP on the FC IDR reflects scope for an upgrade following the increase in the amount of Eurobond proceeds that will be used for repayment of debt due in 2017-2018 and creation of a liquidity buffer. Such refinancing may lead to growth in the hard-currency debt service ratio to levels justifying an FC IDR one notch higher than Ukrainian Country Ceiling of 'B-'. The upgrade of the LC IDR reflects an improvement in the company's liquidity after the recent Eurobond placement. KEY RATING DRIVERS Eurobond Placement Strengthens Financial Flexibility: We expect an improvement in MHP's liquidity and a reduction of refinancing risks once the net USD240 million proceeds from the new seven-year Eurobond are used to repay short-term debt and create a liquidity buffer. The remaining USD245 million will finance a tender for a respective portion of the USD750 million Eurobond due April 2020. MHP's financial flexibility will be strengthened due to lower concentration of debt maturities and the extension of the debt maturity profile. Improved Liquidity Ratio Likely: Fitch upgraded MHP's LC IDR to 'B' from 'B-' due to the expected improvement in the liquidity ratio to above 1x after placement of the new Eurobond. The company's LC IDR is now one notch above Ukraine's LC IDR of 'B-'. Further notching is constrained by MHP's reliance on the domestic market, as 44% of its sales were in Ukraine in 2016. Potential Piercing of Country Ceiling: We expect to upgrade MHP's FC IDR above Ukraine's Country Ceiling of 'B-' due to the improvement in the company's hard-currency external debt service ratio upon completion of the refinancing of debt due 2017-2018 and extension of the PXF facility to three years. We have reassessed the hard-currency external debt service ratio that would result from applying an increased portion of Eurobond proceeds to repayment of short-term debt. We now expect the ratio to be sustained within 1.0x-1.5x until 2020. These levels are commensurate with one-notch rating uplift above the Country Ceiling and would enable us to align MHP's FC IDR with the LC IDR of 'B'. Higher Average Poultry Prices: We expect MHP's average poultry prices to increase in both domestic and export markets and contribute to growth in the company's EBITDA in 2017. MHP introduced price increases in Ukraine at the end of 2016 and this should have a favourable impact on average domestic prices in 2017. We estimate domestic selling prices will grow in US dollar terms for the first time since 2013, but remain well below export prices due to weak consumer sentiment in the country. We believe the company can achieve a slight recovery in export prices in 2017, as it plans to reshuffle its export destinations in favour of more profitable markets and adjust the product mix in accordance with the requirements of each market. Subsidies Only in 2017: Our revised EBITDA forecast for 2017 is above our last-year expectations, as it now incorporates the newly introduced government subsidies to agricultural producers. We estimate that MHP may receive subsidies of around USD30 million in 2017. This will substitute income from the special VAT regime that was fully cancelled from 2017 (2016: USD34 million). However, we do not factor in similar subsidies after 2017, due to the introduction of material limitations on their amounts per legal entity. A subsequent drop in EBITDA in 2018 will be smoothed by growing poultry exports as new production capacity ramps up. Neutral to Positive FCF: Fitch expects MHP to generate neutral to positive FCF over 2017-2020, despite large investments in new production lines in the Vinnytsia poultry complex and dividends. We also take into account some scope for reducing future distributions to shareholders and expansion capex in case of operating underperformance. Strong Business Profile: The ratings benefit from MHP's strong market position as the dominant poultry and processed meat producer in Ukraine, with larger scale, better access to bank financing and a higher degree of vertical integration than its local competitors. The company's ability to expand and diversify export markets is another strong driver of MHP's business profile. Material FX Mismatch: The FX mismatch continues to weigh on MHP's credit profile, as the company's debt is in US dollars and euros, while domestic operations accounted for 44% of revenue in 2016. We do not expect a material reduction in FX risks over the medium term, although poultry exports should grow once the planned extension of production capacity is completed between 2018 and 2020. DERIVATION SUMMARY MHP has smaller business size and weaker ranking on a global scale than international meat processors BRF S.A. (BBB/Negative), Tyson Foods Inc. (BBB/Stable) and JBS S.A. (BB+/Stable). MHP has similar credit metrics and vertically integrated business model as the largest Russian pork producer, Agri Business Holding Miratorg LLC (B+/Stable). MHP's business profile is slightly stronger due to access to export markets, but this is offset by higher exposure to FX risks. MHP's LC IDR is lower because it is constrained by the large portion of its operations that take place in Ukraine, which has a Sovereign LC IDR of 'B-'. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - UAH/USD at 27.2 in 2017 and 28.5 thereafter; - 5% CAGR in sales volumes over 2017-2021 (mostly from increasing exports); - domestic poultry price growth slightly below Ukraine's CPI; - mid-single-digit growth in average export prices due to product mix adjustments, but no recovery in international grain and vegetable oil prices over 2017-2018; - government subsidies of around USD30 million in 2017 and zero thereafter; - construction of new poultry production capacity and land bank expansion, leading to capex at 10%-15% of revenue over 2017-2020; - EBITDA margin around 30%; - dividends not exceeding USD80 million a year; - no M&A; - maintenance of offshore cash balances of around USD100 million. RATING SENSITIVITIES For LC IDR: Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - Improved operating environment in Ukraine reflected in a higher sovereign LC IDR - Reduction in MHP's dependence on the local economy as measured by material decrease in proportion of domestic sales in revenues Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - FFO-adjusted leverage above 4.5x and RMI-adjusted FFO fixed charge cover below 2.0x on a sustained basis - Liquidity ratio below 1x on a sustained basis coupled with deteriorated access to external funding For FC IDR: Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - Refinancing of debt due 2017-2018 and extension of PXF facility to three years leading to a sustained improvement of hard-currency debt service ratio to 1.0x-1.5x over the rating horizon, as calculated in accordance with Fitch's methodology "Rating Non-Financial Corporates Above the Country Ceiling" Future Developments That May, Individually or Collectively, Lead to Negative Rating Action The Rating Watch Positive would be removed and the IDR affirmed with a Stable Outlook if allocation of Eurobond proceeds does not lead to a sustained improvement of the hard-currency debt service ratio to 1.0x-1.5x over the rating horizon. LIQUIDITY, DEBT AND GROUP STRUCTURE Improved Liquidity after Eurobond Placement: We expect an improvement in MHP's liquidity ratio to well above 1x after the new Eurobond placement, as USD240 million of proceeds will be used to repay short-term debt and create a cash overfund. Average Recoveries for Unsecured Bondholders: Both Eurobonds are rated in line with MHP's Long-Term IDR of 'B-', reflecting average recovery prospects given default. Fitch treats Eurobonds pari passu with other senior unsecured debt of the group, which is raised primarily by operating companies, despite being issued by the holding company. There are no structural subordination issues, as the Eurobond is covered by suretyships from operating companies, altogether accounting for around 90% of the group's EBITDA in 2016. The Rating Watch Positive on the senior unsecured rating reflects scope for an upgrade if MHP's FC IDR is upgraded. Parent-Subsidiary Linkage: The Long-Term IDRs of PJSC Myronivsky Hliboproduct, MHP S.A.'s 95.4% owned subsidiary, are equalised with those of the parent, due to strong strategic and legal ties between the companies. Myronivsky Hliboproduct is a marketing and sales company for goods produced by the group in Ukraine. The strong legal links with the rest of the group are ensured by the presence of cross-default/cross-acceleration provisions in Myronivsky Hliboproduct's major loan agreements and suretyships from operating companies generating a substantial portion of the group's EBITDA. FULL LIST OF RATING ACTIONS MHP S.A. -- Long-Term Foreign-Currency IDR: 'B-' rating placed on RWP -- Long-Term Local-Currency IDR: upgraded to 'B' from 'B-', off RWP, Stable Outlook -- Foreign-currency senior unsecured rating: 'B-'; Recovery Rating of 'RR4', the rating placed on RWP -- Foreign-currency senior unsecured rating (recent Eurobond): assigned final 'B-', Recovery Rating of 'RR4', the rating placed on RWP OJSC Myronivsky Hliboproduct (95.4% owned subsidiary of MHP S.A.) -- Long-Term Foreign-Currency IDR: 'B-' rating placed on RWP -- Long-Term Local-Currency IDR: upgraded to 'B' from 'B-', off RWP, Stable Outlook -- National Long-Term rating: upgraded to 'AA+(ukr)' from 'A-(ukr)', off RWP, Stable Outlook Contact: Principal Analyst Anna Zhdanova, CFA Associate Director +7 495 956 2403 Supervisory Analyst Giulio Lombardi Senior Director +39 02 8790 87214 Fitch Italia S.p.A. Via Morigi 6, 20123 Milano Committee Chairperson Roelof Steenekamp +49 69 768 076 113 Summary of Financial Statement Adjustments Cash: Fitch adjusted available cash at end-2016 by deducting USD25 million cash held for operating purposes. Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: julia.belskayavontell@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable Criteria Country-Specific Treatment of Recovery Ratings (pub. 18 Oct 2016) here Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016) here Rating Non-Financial Corporates Above the Country Ceiling Rating Criteria (pub. 15 Feb 2017) here Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 21 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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