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Fitch Affirms Russia's Miratorg at 'B+'; Outlook Stable
May 26, 2017 / 9:26 AM / in 7 months

Fitch Affirms Russia's Miratorg at 'B+'; Outlook Stable

(The following statement was released by the rating agency) MILAN/LONDON, May 26 (Fitch) Fitch Ratings has affirmed Russia-based Agribusiness Holding Miratorg LLC's (Miratorg) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'B+'. The Outlook is Stable. Fitch has also downgraded Miratorg Finance LLC's senior unsecured rating on its RUB5 billion bond due in April 2021 to 'B-'/'RR6' from 'B'/'RR5'. The ratings' affirmation reflects Miratorg's strong market position in Russia, its high degree of vertical integration across the value chain, and our expectation that the group will maintain moderate leverage over 2017-2020 (including guaranteed but unconsolidated projects) and good access to bank financing. The ratings factor in state support for the sector and our view that recent changes in the mechanism of interest rate reimbursements will be largely neutral for Miratorg's credit profile. However, the company's unique and complex group structure constrains the ratings at 'B+'. KEY RATING DRIVERS Vertically Integrated Business Model: Miratorg's ratings are supported by the group's leading position in the Russian pork market and its vertical integration across the value chain, from crop growing and fodder production to livestock breeding, slaughtering and product delivery. This enables the company to maintain higher-than-peer EBITDA margins and to smooth out the business's inherent volatility. EBITDA Resilience: In 2016 the group's EBITDA decreased, but was better than our forecast, proving the resilience of Miratorg's business model to adverse changes in meat prices and fodder costs. The group's resilience to external factors should be further enhanced in 2017-2018 as Miratorg executes its efficiency improvements in its pork division, increases its output of poultry, semi-finished food and packaged meat, and reaches self-sufficiency in grain. Sub-Standard Corporate Governance: Fitch does not apply any company-specific notching to Miratorg's ratings for corporate governance, but they are constrained at 'B+' by a complex group and governance structure. The group provides financial support to its related parties involved in the rearing and processing of poultry and cattle. Suretyships for Related-Party Obligation: Miratorg guarantees the debt of Bryansky Broiler LLC, Kalinigradskaya Myasnaya Kompaniya LLC and AF Blagodatenskaya LLC (since 2016). The three related-party entities are owned by Miratorg's shareholders and involved respectively in poultry production, cattle breeding and veal production. Guaranteed debt was around RUB24 billion at end-2016 (in addition to total group debt of RUB81 billion), while the total EBITDA of these projects was around RUB2 billion. Our ratings take into account debt and profits of these related parties in view of the group's track record of developing certain businesses through related-party entities and later bringing them onto the balance sheet. Miratorg is likely to consolidate the poultry business in 2017. This business has most of the debt (around RUB18 billion at end-2016). Support to Related-Party Beef Project: The company's shareholders are also developing a beef business, partly with the financial help of Miratorg. Miratorg does not guarantee the debt of this project but has been making some cash contributions through related-party loans and favourable payment terms, as it distributes the beef produced by this related party. In 2016 such support decreased as the project obtained long-term working capital lines in addition to capex financing (without recourse to Miratorg). Fitch's rating perimeter excludes beef production business due to its ring-fenced nature and our expectation that it should remain outside Miratorg's consolidation scope over the rating horizon. Nevertheless, we conservatively assume additional cash support from Miratorg through related-party loans of around RUB5 billion per year in 2018-2020. Higher-than-expected outflows to related parties may put pressure on Miratorg's credit metrics and liquidity. Pork Production Doubling Not Assumed: Our rating does not factor in the potential doubling of pork production that Miratorg envisages over the medium term. Timing, funding and other features of this project are still being studied and management intends to launch it only if the regulatory environment improves. Nevertheless, if the project is approved, this could result in a downgrade of Miratorg's ratings in view of the large amount of potential investments (estimated by the company at RUB160 billion), which are likely to be debt-funded. Moderate Leverage: We expect Miratorg to maintain moderate FFO adjusted gross leverage within 3.0x-3.5x (including debt and profits of guaranteed projects which contribute 0.5x to leverage), which is comfortable for the rating. State Support for the Sector: Being an agricultural producer, Miratorg enjoys a favourable tax regime and subsidised interest rates. This helps its cash flow generation, leading to improved financial flexibility. As food self-sufficiency remains one of key objectives of the Russian government, we expect state support to agricultural producers to be maintained. DERIVATION SUMMARY Miratorg has smaller business size and a weaker ranking on a global scale than international meat processors Tyson Foods Inc. (BBB/Stable), Smithfields Foods Inc. (BBB/Stable) and BRF S.A. (BBB/Negative), but has a slightly stronger credit profile than Marfrig Global Foods S.A. (BB-/Stable) and Minerva S.A. (BB-/Stable). However, the operating environment in Russia contributes to a lower rating for Miratorg relative to global peers. Miratorg has similar credit metrics and a similar vertically integrated business model to the largest Ukrainian poultry producer, MHP S.A. (B-/RWP). 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 of 'B' is lower than Miratorg's because it is constrained by the large portion of its operations that take place in Ukraine, which has a Sovereign Local-Currency IDR of 'B-'. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - revenue growth in the low teens in 2017, driven by growing sales volumes of distributed beef and poultry, and of its own pork production, and mid-single-digit growth thereafter; - EBITDA margin around 25% over 2017-2020; - outflow of RUB12 billion related to poultry business acquisition in 2017; - capex at 9%-10% of revenue over 2017-2020; - no material deterioration in working-capital turnover; - maintenance of state support to the sector, including interest rate subsidies; - additional loans to related parties of not more than RUB5 billion per year over 2018-2020; - no dividends. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action An upgrade is unlikely in the coming two years, unless there is an improvement in corporate governance, including better group structure transparency and diminishing cash support to related parties, and subject to: - FFO adjusted gross leverage sustainably around 3.0x (both including and excluding guaranteed projects); - FFO fixed charge cover sustainably above 3.0x ; - FCF margin close to mid-single digits, coupled with the management's commitment to a conservative capital structure. - Adequate liquidity Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - FFO adjusted gross leverage consistently above 4.0x (both including and excluding guaranteed projects) - FFO fixed charge cover sustainably below 2.0x - Material deterioration in free cash flow (FCF) generation driven, for example, by lower EBITDA margin, and/or larger-than-expected loans to related parties - Liquidity shortage caused by the limited availability of bank financing in relation to short-term maturities or refinancing at more onerous terms than expected LIQUIDITY, DEBT AND GROUP STRUCTURE Insufficient but Improved Liquidity: As of end-2016 Fitch-adjusted unrestricted cash balances of RUB21 billion, committed undrawn credit facilities of RUB19 billion were not sufficient to cover short-term debt of RUB49 billion. Nevertheless, there was an improvement in liquidity ratio versus previous years due to higher cash balances supported by stronger internal cash generation and decreased support to the beef project in 2016. As usual, the major part of debt maturing in 2017 was represented by working-capital facilities and we expect Miratorg to extend these credit lines upon maturity. Complex Group Structure: Miratorg's audited consolidated accounts include entities that are not owned by the parent but rather by its ultimate shareholders. Consolidation is based on agreements for the preliminary sale and purchase of such entities signed between its shareholders and the parent. According to management, these agreements represent potential voting rights that could be exercised at any time until 2020. Among these entities the most material to the group are Miratorg Finance LLC, the bond issuing vehicle, and TK Miratorg LLC, the major trading company that distributes Miratorg's products as well as poultry and beef produced by its related parties. Poor Recoveries for Unsecured Bondholders: The downgrade of the rating of Miratorg Finance LLC's local RUB5 billion bonds due April 2021 to 'B-'/RR6 from 'B'/RR5 reflects a deterioration in recovery prospects in the event of default. Fitch's going-concern scenario valuation approach points to poor recoveries, leading to a two-notch discount to the senior unsecured rating compared with Miratorg's IDR of 'B+'. The reduction in the recovery rate follows an increase in prior-ranking debt to RUB95 billion from RUB85 billion. Fitch treats secured and unsecured debt at operating companies, including guaranteed debt of related parties, as debt ranking prior to the bonds. Although bondholders have an option to put the bonds to TK Miratorg LLC, this, in our view, is insufficient to eliminate subordination issues as TK Miratorg LLC makes only a marginal contribution to the group's EBITDA and assets. FULL LIST OF RATING ACTIONS Agri Business Holding Miratorg LLC -- Long-Term Foreign and Local-Currency IDRs: affirmed at 'B+'; Outlook Stable Miratorg Finance LLC --senior unsecured rating of RUB5 billion local bond due April 2021: downgraded to 'B-'/RR6 from 'B'/RR5' Contact: Principal Analyst Anna Zhdanova, CFA Associate Director +7 495 956 2403 Supervisory Analyst Giulio Lombardi Senior Director +39 02 879087214 Fitch Italia S.p.A. via Morigi 6 20123 Milan 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 RUB1.5 billion for cash held for operating purposes. - Consolidation scope: Fitch analyses Miratorg by including debt and profits of guaranteed projects. Our projected figures are shown including an adjustment for these. We added RUB23.3 billion and RUB2.3 billion, respectively, to projected total debt and EBITDA for 2017. 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 Applicable Criteria Country-Specific Treatment of Recovery Ratings (pub. 18 Oct 2016) here Criteria for Rating Non-Financial Corporates (pub. 10 Mar 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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