September 18, 2017 / 12:34 PM / 10 months ago

Fitch Upgrades MHP's IDR to 'B'; Outlook Stable

(The following statement was released by the rating agency) LONDON/MOSCOW, September 18 (Fitch) Fitch Ratings has upgraded MHP SE's Long-Term Foreign-Currency (FC) Issuer Default Rating (IDR) and senior unsecured rating to 'B' from 'B-' and removed them from Rating Watch Positive. A full list of rating actions is detailed below. The upgrade follows the improvement in MHP's liquidity profile and hard currency debt service ratio after refinancing of a substantial portion of its debt with the proceeds of its Eurobond issue and the extension of the tenor of its pre-export finance (PXF) facility from one to three years. KEY RATING DRIVERS Increased Financial Flexibility: MHP's liquidity improved and refinancing risks fell after the net USD240 million proceeds from the seven-year Eurobond placed in May 2017 were used to repay short-term debt and create a liquidity buffer. The remaining USD245 million financed a tender for a portion of the USD750 million Eurobond due April 2020. In addition, in the end of August 2017 MHP extended the tenor of its USD100 million PXF facility from one to three years, which will cover the funding needs for its sunflower crushing operations. MHP's financial flexibility improved due to a lower concentration of debt maturities and the extension of the debt maturity profile. Piercing of Country Ceiling: Fitch upgraded MHP's FC IDR to 'B', one notch 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 expect the ratio to be sustained within 1.0x-1.5x until 2020 when one of the company's Eurobonds matures. Higher Average Poultry Prices: In 1H17 MHP's average poultry prices increased by 12% in US dollars and contributed to 26% yoy growth in the company's EBITDA. This was driven by MHP's export product mix optimisation as well as geographic diversification and slight increase in international poultry prices. In addition domestic selling prices grew in US dollar terms for the first time since 2013 due to price increases in 2H16 and relatively stable exchange rates. Nevertheless, we expect domestic prices to remain below export prices due to weak consumer sentiment in the country. Subsidies Only in 2017: Our EBITDA forecast for 2017 incorporates the government subsidies to agricultural producers 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 if there is 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 42% of revenue in 1H17. 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 is smaller than international meat processors BRF S.A. (BBB/Negative), Tyson Foods Inc. (BBB/Stable) and JBS S.A. (BB/RWN). It has similar credit metrics and a similarly vertically integrated business model to the largest Russian pork producer, Agri Business Holding Miratorg LLC (B+/Stable). MHP's has better corporate governance practices and slightly stronger business profile due to its access to export markets but is more exposed 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, being therefore largely exposed to a weak operating environment. MHP's FC IDR exceeds the Ukraine's Country Ceiling by one notch due to sufficiently high hard-currency debt service ratio over the next three years. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - USD/UAH at 28.0 in 2017, 29.3 in 2018 and 30.2 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 above 30%; - dividends not exceeding USD80 million a year; - no M&A; - maintenance of offshore cash balances of around USD100 million. RATING SENSITIVITIES For Local-Currency 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 or - Reduction in MHP's dependence on the local economy as measured by material decrease in proportion of domestic sales in revenues In both cases an upgrade would be subject to the maintenance of adequate liquidity and FFO adjusted leverage staying sustainably below 3.5x. 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, both on a sustained basis - Liquidity ratio below 1x on a sustained basis coupled with deteriorated access to external funding For Foreign-Currency IDR: Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - Hard-currency debt service ratio above 1.5x over the rating horizon, as calculated in accordance with Fitch's methodology "Rating Non-Financial Corporates Above the Country Ceiling" or - Ukraine's Country Ceiling being raised to 'B+' or above In both cases an upgrade would be subject to the maintenance of adequate liquidity and FFO adjusted leverage sustainably below 3.5x. 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, both on a sustained basis - Liquidity ratio below 1x on a sustained basis coupled with deteriorated access to external funding - Hard-currency debt service ratio below 1x over the rating horizon LIQUIDITY, DEBT AND GROUP STRUCTURE Improved Liquidity: As of 1 September 2017 MHP's liquidity position was strong as short-term debt of USD36 million was well covered by Fitch-adjusted unrestricted cash of USD165 million. Short-term debt has fallen substantially since end-March (USD271 million) due to the recent refinancing. In addition, liquidity and refinancing risks fell after MHP extended the tenor of its committed USD100 million PXF facility from one to three years. Average Recoveries for Unsecured Bondholders: The ratings of the senior unsecured Eurobonds have been upgraded and aligned with MHP's Long-Term IDR of 'B', reflecting average recovery prospects given default. Fitch treats the Eurobonds as 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 (which we consider akin to guarantees) from operating companies, altogether accounting for around 90% of the group's EBITDA in 2016. 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 the 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. KEY RECOVERY RATING ASSUMPTIONS The recovery analysis assumes that MHP SE would be considered a going concern in bankruptcy and that the company would be reorganised rather than liquidated. We have assumed a 10% administrative claim. Going-Concern Approach: MHP's going concern EBITDA is based on LTM June 2017 EBITDA. The going-concern EBITDA estimate reflects Fitch's view of a sustainable, post-reorganisation EBITDA level upon which we base the valuation of the company. The going-concern EBITDA is 45% below LTM EBITDA to reflect the company's vulnerability to FX risks and the volatility of poultry, grain and sunflower seeds prices, as well as costs of certain raw materials. An EV/EBITDA multiple of 4x is used to calculate a post-reorganisation valuation and reflects a mid-cycle multiple. The multiple is same as for Kernel Holding S.A., a Ukrainian agricultural commodity trader and processor. Our debt waterfall assumptions take into account debt at 1 September 2017. In addition, the new secured USD100 million PXF facility is assumed to be fully drawn upon default. Senior unsecured Eurobonds (USD1 billion in total) and unsecured bank loans are structurally subordinated to the secured PXF. The waterfall results in a 'RR3' Recovery Rating for senior unsecured Eurobonds. However, the recovery rating is capped at 'RR4' due to the Ukrainian jurisdiction. Therefore, the senior unsecured Eurobonds are rated 'B'/'RR4'/50%. FULL LIST OF RATING ACTIONS MHP SE -- Long-Term Foreign-Currency IDR: upgrade to 'B' from 'B-', off RWP, Stable Outlook -- Long-Term Local-Currency IDR: affirm at 'B', Stable Outlook -- Foreign-currency senior unsecured rating: upgrade to 'B' from 'B-'; Recovery Rating of 'RR4', off RWP OJSC Myronivsky Hliboproduct (95.4% owned subsidiary of MHP SE) -- Long-Term Foreign-Currency IDR: upgrade to 'B' from 'B-', off RWP, Stable Outlook -- Long-Term Local-Currency IDR: affirm at 'B', Stable Outlook -- National Long-Term rating: affirm at 'AA+(ukr)', 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 Pablo Mazzini Senior Director +44 20 3530 1021 Summary of Financial Statement Adjustments Cash: Fitch adjusted available cash at end-2016 by deducting USD25 million cash held for operating purposes. Operating Leases: Fitch has adjusted the debt by adding 5x annual operating lease expense (2016: USD18 million). The 5x lease multiple is standard for companies operating in Ukraine. Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email:; Adrian Simpson, London, Tel: +44 203 530 1010, 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. Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here Country-Specific Treatment of Recovery Ratings (pub. 18 Oct 2016) here Non-Financial Corporates Notching and Recovery Ratings Criteria (pub. 16 Jun 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 Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here 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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