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Fitch Places MHP's LC IDR on RWP; Rates Planned Eurobond 'B-(EXP)'
April 18, 2017 / 2:14 PM / 5 months ago

Fitch Places MHP's LC IDR on RWP; Rates Planned Eurobond 'B-(EXP)'

(The following statement was released by the rating agency) MOSCOW, April 18 (Fitch) Fitch Ratings-Moscow/Milan/Frankfurt-18 April 2017: Fitch Ratings has placed MHP S.A.'s 'B-' Long-Term Local-Currency (LC) Issuer Default Rating (IDR) on Rating Watch Positive (RWP) and affirmed the Foreign-Currency (FC) IDR at 'B-'. The Outlook on FC IDR was revised to Stable from Negative. The agency has also assigned MHP's planned unsecured Eurobond an expected rating of 'B-(EXP)'. The final ratings of the bonds are contingent upon receipt of final documents conforming to the information already received by Fitch. A full list of rating actions is detailed below. Fitch has reassessed MHP's performance and business plan in the context of an improving macroeconomic environment in Ukraine, as well as the liquidity position that will result from the company's planned refinancing. The change of Outlook to Stable reflects the agency's expectation of MHP's stronger cash generation over 2017-2020, due to better price mix and growing exports. The Rating Watch Positive on the LC IDR reflects scope for an upgrade in connection to the planned refinancing. KEY RATING DRIVERS Stronger Financial Flexibility After Eurobond Placement: We expect an improvement in MHP's liquidity and a reduction of refinancing risks after the new Eurobond placement. USD150 million of proceeds will be applied towards short-term debt, reducing it to a level sufficiently covered by internal liquidity sources. The remaining Eurobond proceeds will be used to refinance a portion of the existing USD750 million Eurobond, due April 2020. As a result, MHP's financial flexibility will be strengthened due to a lower concentration of debt maturities and the extension of the debt maturity profile beyond 2023. Potential LC IDR Upgrade: MHP's LC IDR is currently in line with Ukraine's LC IDR of 'B-', reflecting the company's dependence on the local economy and weak liquidity ratio, due to high short-term debt. If the refinancing completes successfully, we expect a substantial improvement in MHP's liquidity position, with the liquidity ratio increasing well above 1x. This should lead to a one-notch upgrade of MHP's LC IDR to 'B'. Further notching is constrained by MHP's reliance on the domestic market as an important portion of its sales takes place in Ukraine (2016: 44%). Country Ceiling Constraint: MHP's FC IDR remains constrained by Ukraine's Country Ceiling of 'B-', as the company's hard currency debt service ratio is not sufficient to justify a higher rating. We expect an improvement in the ratio after the placement of the Eurobond and the extension of the PXF facility to three years. However, the ratio would be just slightly above the minimum threshold of 1x, which suggests that there is not enough support for the ratings to be above the Country Ceiling. Our assessment also takes into account potential volatility of the ratio within the year, due to working capital swings. Higher Average Poultry Prices: We expect MHP's average poultry prices to increase both in domestic and export markets and contribute to growth in the company's EBITDA in 2017. MHP has already 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 that 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 that 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 previous 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 sizeable investments in new production lines in the Vinnytsia poultry complex and dividends. We also take into account some scope for flexing down 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 are other strong drivers 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. Nevertheless, MHP's LC IDR is lower, as it is constrained by the fact that an important portion of its operations takes 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; 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 RATING SENSITIVITIES For LC IDR: Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - Successful completion of the refinancing process with issuance of a new bond which extends the company's debt repayment profile. 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 the refinancing does not take place on the terms reviewed by Fitch. For FC IDR: Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - Hard currency debt service ratio staying within 1.0x-1.5x over the rating horizon, as calculated in accordance with Fitch's methodology "Rating Non-Financial Corporates Above the Country Ceiling". - Ukraine's Country Ceiling being raised. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - A liquidity shortage caused by worsened access to bank financing, or by refinancing at more onerous terms than expected. - Further significant hryvnia depreciation, sustained operational underperformance, or larger-than-expected capex and dividends, resulting in material weakening of MHP's credit metrics. LIQUIDITY, DEBT AND GROUP STRUCTURE Improved Liquidity after Refinancing: We expect an improvement in MHP's liquidity after the new Eurobond placement, as USD150 million of proceeds will be applied towards short-term debt reduction and the USD100 million PXF facility will be extended for three years. Liquidity sources, including Fitch-adjusted cash balances (YE16: USD130 million), undrawn committed credit lines (YE16: USD6 million), proceeds from the disposal of Crimean operations and expected positive FCF, should exceed remaining 2017 debt maturities of USD29 million (pro forma YE16). The remaining Eurobond proceeds will be used to refinance a portion of the existing USD750 million Eurobond, due April 2020. The lower concentration of debt maturities and the extension of the debt maturity profile should also strengthen the company's financial flexibility and reduce refinancing risks. Average Recoveries for Unsecured Bondholders: Both existing and planned 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. Parent-Subsidiary Linkage: The Long-Term IDR's 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 linkage with the rest of the group is 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: affirmed at 'B-' ', Outlook revised to Stable from Negative -- Long-Term Local-Currency IDR: 'B-' placed on RWP -- Foreign-currency senior unsecured rating: affirmed at 'B-'; Recovery Rating of 'RR4' -- Foreign-currency senior unsecured rating (planned Eurobond): assigned 'B-(EXP)', Recovery Rating of 'RR4' OJSC Myronivsky Hliboproduct (95.4% owned subsidiary of MHP S.A.) -- Long-Term Foreign-Currency IDR: affirmed at 'B-', Outlook revised to Stable from Negative -- Long-Term Local-Currency IDR: 'B-' placed on RWP -- National Long-Term rating: 'A-(ukr)' placed on RWP 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 USD25m for 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. 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