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Fitch Publishes UkrLandFarming 'B' Foreign Currency IDR; Outlook Stable
March 7, 2013 / 4:10 PM / 5 years ago

Fitch Publishes UkrLandFarming 'B' Foreign Currency IDR; Outlook Stable

(The following statement was released by the rating agency) LONDON/MOSCOW, March 07 (Fitch) Fitch Ratings has published UkrLandFarming PLC (ULF) Long-term foreign and local currency Issuer Default Ratings (IDRs) of 'B' and 'B+', respectively. Fitch has also published a National Long-term Rating of 'AA+'(ukr). The Outlooks are Stable. KEY RATING DRIVERS Leading market positions in agribusiness The ratings reflect ULF's leading position in Ukrainian agriculture and dominating domestic positions, albeit mitigated by ULF's exposure to volatility in selling prices for many of the segments in which it operates; its geographically diverse and efficient farming operations supported by additional production of higher value-added products. Fitch recognises the tough sugar environment in sugar production in Ukraine although this segment only accounted for 4% of reported EBITDA in 2012. ULF has also demonstrated an ability to effectively gain scale in its core businesses of crop farming and eggs production (the latter via Avangardco, rated 'B' by Fitch) through both acquisitions and green field capital projects. Consolidated group profile The assigned ratings factor the consolidated profile of the ULF group reflecting the evidence of some legal ties by way of cross-default provisions inserted in some of ULF's key loan agreements even though Avangardco does not provide guarantees to any debt owed by ULF but also its own debt does not benefit from ULF guarantees. However, Fitch notes that ULF does control Avangardco's profits, albeit with the limitations of this subsidiary to upstreaming cash set by a debt incurrence leverage test of 3.0x. Fitch acknowledges that Avangardco's management teams and treasury functions remain separated from ULF and that trading relations between the two companies are limited. As of FY12, Avangardco's EBITDA of USD250m represented 24% of ULF's consolidated profits. Solid profitability ULF shows adequate profitability, measured as funds from operations (FFO) margin of sales, at 29% (2012), although lower than some peers, because of ULF's diversification into lower-margin distribution activities. These operations help diversify ULF's revenue streams into less capital intensive areas while ensuring the supply of agriculture inputs to the crops division on an arms-length basis. By way of comparison, Mriya's ('B') FFO margin exceeds 40% as a pure farming business. Regulation Risk Remains ULF remains exposed to the imposition of regulatory restrictions on grain trading in Ukraine which can affect grain prices and volumes and hence the profitability of the crops division which represented 55% of reported EBITDA (2012). However this may benefit Avangardco as it purchases forage grain from third parties (outside ULF) for animal feed as a key input for its egg production. Steady free cash flow generation The company's growth plans - mostly focused on land bank expansion and related spending in silos and machinery - remain ambitious. However on a consolidated basis Fitch projects average annual spend over 2013-2015 to remain broadly aligned with 2012's USD460m (70% of which related to the final phases of Avangardco's egg capacity expansion projects) and to be funded internally. Therefore we expect positive annual free cash flow (FCF) and forecast an average FCF margin (as percentage of sales) exceeding 10% for the next four years, although possibly somewhat weaker in 2013. Moderate leverage ULF shows moderate financial leverage with an FFO-adjusted net leverage of 1.8x (2012). However Fitch notes the limited sources of financing so far outside of bank financing even though we acknowledge that ULF may be looking to access the debt capital markets to diversify its funding sources and lengthen its debt maturity profile. ULF also had USD176m of cash and deposits placed in related-party banks. Conservatively excluding this amount from our net leverage calculation, FFO adjusted net leverage would be 2.1x, still fully aligned with the assigned ratings. Reliance on short-term debt ULF's debt profile is skewed towards shorter-term debt maturities as 41% of the group's debt is due in 2013 (USD537m). While any planned bond issue would help to tackle upcoming debt maturities, any near-term refinancing risks are factored in to the assigned ratings even though ULF has historically relied upon related-party banks for committed revolving bank lines. Fitch expects solid cash flow from operations, available unrestricted cash, scalable capex and liquid inventories to support the group's financial flexibility. Fitch expects working capital facilities to be rolled over and projects that FCF should be sufficient to cover maturing long-term loans. Corporate governance concerns Compared to MHP or Kernel, ULF's corporate governance practices are considered weaker. Some of those practices are typical for a non-public company and are expected to constrain any further positive rating momentum. Several outliers in corporate governance issues, in Fitch's opinion, provide negative pressure on the ratings - in particular, the current state of related party transactions with banks owned by Mr Bakhmatyuk, and ULF's stance to maintain a relationship with these banks in future. This diminishes the overall transparency of the group in Fitch's view. We note that the probability of conflicts of interests between ULF and related-party banks may increase, should the banking system in Ukraine be further distressed, or if liquidity issues arise specifically for these banks. RATINGS SENSITIVITIES Positive: Future developments that could lead to positive rating actions include: - A positive rating action on the local currency IDR would require ULF to improve its corporate governance practices, particularly in the area of transactions with related-party banks. - In terms of financial guidelines, a higher IDR depends on ULF maintaining FFO margin above 30%, positive FCF and expansion plan funded mainly by internal cash flows leading to FFO adjusted leverage (gross) below 1.5x on a continuing basis. An upgrade of the foreign currency IDR would be possible only if the Country Ceiling for Ukraine was upgraded (currently 'B'). Negative: Future developments that could lead to negative rating action include: - A contraction of FFO below USD300m - An increase in FFO adjusted leverage (gross) to 3.0x on a continuing basis - FFO fixed charge cover weakening below 4x - Weakening liquidity measured as FCF for 2014 plus unrestricted cash and available undrawn bank lines at the beginning of the year divided by short-term debt maturities, below 0.8x on a continuing basis. This calculation excludes grain inventory in silos which Fitch understands is unhedged for price risk. Contact: Principal Analyst Anton Shishov Associate Director +7 495 956 55 69 Supervisory Analyst Pablo Mazzini Senior Director +44 20 3530 1021 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Giulio Lombardi Senior Director +39 02 8790 87214 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email:; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on 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. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable criteria, 'Corporate Rating Methodology' dated 8 August 2012 are available at Applicable Criteria and Related Research Corporate Rating Methodology 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 WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

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