Fitch Rates UkrLandFarming's Unsecured Bond at 'B'/'RR4'

Tue Mar 26, 2013 12:45pm EDT

(The following statement was released by the rating agency) MOSCOW/LONDON, March 26 (Fitch) Fitch Ratings has assigned UkrLandFarming PLC's (ULF) USD275m 10.875% Eurobond issue due in 2018 a senior unsecured rating of 'B' with a Recovery Rating of 'RR4'. Fitch expects the bond issue proceeds to help address the group's short-term debt maturities and its 2013 capex program. The rating action follows the review of the final terms of the bond issue conforming to information already received by Fitch apart from the lower than expected size of the bond placement. ULF's Long-term foreign currency Issuer Default Rating (IDR) is 'B' with a Stable Outlook. This rating is capped by Ukraine's Country Ceiling of 'B'. ULF's Long-term local currency IDR is 'B+' and its National Long-term rating 'AA+(ukr)'. ULF's ratings reflect its leading market positions in agribusiness despite high regulation risks and exposure to volatile selling prices translating into high business risks. However, the financial risk profile is more conservative, driven by solid profitability and expectation of steady free cash flow (FCF) generation despite relatively high capex planned for 2013. The ratings capture the group's moderate leverage with funds from operations (FFO)-adjusted net leverage at 1.8x (2012) or 2.1x excluding USD176m of cash and deposits placed in related-party banks as of 31 December 2012. We also recognise the group's historical reliance on short-term debt financing (largely addressing seasonal working capital needs) and certain corporate governance concerns relative to other rated Ukrainian agribusiness entities (see "Fitch Publishes UkrLandFarming 'B' Foreign-Currency IDR; Outlook Stable" dated 7 March 2013 at www.fitchratings.com.) KEY RATING DRIVERS Consolidated Group Profile The ratings factor in ULF group's consolidated profile, reflecting the evidence of strengthening legal ties as the key group subsidiaries, including the largest operating entities of Avangardco, will guarantee ULF's Eurobond. This feature adds to the cross-default provisions between Avangardco and ULF in some of ULF's key loan agreements. We also note that ULF controls Avangardco's profits, albeit with the limitations of this subsidiary to upstreaming cash set by a debt incurrence leverage test of 3.0x. As of FY12, Avangardco's EBITDA of USD250m -based on Fitch's computation- represented 24% of ULF's consolidated profits. Although Fitch does not factor in any dividend payments received by ULF from Avangardco to service its debt, we recognise that Avangardco may start a dividend policy once its completes its expansion programme. Manageable Liquidity Although the bond proceeds were lower than anticipated, Fitch does not have any major concerns regarding ULF's liquidity profile above what is factored into the current rating. We expect up to USD175m of bond proceeds to be used for capex and USD100m for repayment of short-term debt, primarily in relation to the Deutsche Bank/Sberbank loan. Relatively high spending on capex shows some confidence on the part of management that other near-term debt maturities can be met from internally-generated cash flow or rollover. Adequate Recovery Prospects The bond issue will rank as a senior unsecured obligation of ULF, and benefit from upstream guarantees (which are suretyships under Ukrainian law) from several operating subsidiaries, including Avangardco's main subsidiaries. Fitch understands that these guarantors accounted for approximately 84% of net assets and 85% of consolidated EBITDA for 2012. In a distressed scenario, Fitch considers the Eurobond to rank below senior secured debt and other subsidiary debt (including Avangardco's Eurobond) representing a moderate 1.0x of priority debt/2013 forecast EBITDA. This leaves adequate recoveries for ULF's Eurobond and other unsecured creditors. However, Fitch applies a soft cap of 'RR4' for issuers whose activities are based in Ukraine. RATINGS SENSITIVITIES Positive: Future developments that could lead to positive rating action 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 its FFO margin above 30%, a positive FCF and the funding of its expansion plan mainly through internal cash flows, thus allowing 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: 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. 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 www.fitchratings.com. 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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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