April 2 (The following statement was released by the rating agency)
Fitch Ratings has assigned MHP S.A.'s (MHP)USD750m 8.25% Eurobond issue due in 2020 a final senior unsecured rating of 'B' with a Recovery Rating of 'RR4'. The issue is expected to phase out the group's debt maturities by financing a tender offer for 60% of the issuer's existing USD585m senior notes due 2015 and repaying short term debt. Fitch understands that the remaining cash proceeds of up to USD300m after covering debt extension will be used fund selective land bank expansion and boost cash liquidity.
The rating action follows the review of the final terms of the bond issue conforming to information already received by Fitch.
MHP'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'. MHP's Long-term local currency IDR is 'B+'. OJSC Myronivsky Hliboproduct's (MHP S.A.'s 99.9% owned subsidiary) Long-term foreign currency and local currency IDRs are 'B' and 'B+', respectively, and its National Long-term rating is 'AA+(ukr)'.
KEY RATING DRIVERS
Substantially Equal Terms
The new notes will rank as senior unsecured obligations, and benefit from upstream guarantees (which are suretyships under Ukrainian law) from seven operating subsidiaries. The terms of the new notes are substantially the same as the terms of the existing USD585m senior notes due 2015 (which will now reduce to USD235m post tender offer), with a key exception being that the debt incurrence covenant is based on a net debt/EBITDA of less than 3x against 2.5x for the existing bonds.
Aggressive Dividend Policy
MHP's announcement of a dividend of USD120m payable in 2013 based on the solid results for 2012 (equating to around 38% dividend pay-out) is considered aggressive by Fitch, although affordable based on our earnings expectations until 2015. It will cause the de-leveraging path to be slower than previously expected, as free cash flow may turn negative again, especially if capex resumes in 2015 for phase 2 of the Vinnitsa project. At present, Fitch estimates that funds from operations (FFO) adjusted net leverage would remain below 3x through to 2016; however the margin of manoeuvre within its IDR will diminish and the headroom available under its credit ratios will be low if such aggressive dividend policy is maintained over time.
Higher Debt yet Diminishing Leverage
Issuance of the new notes will increase the debt quantum at the onset but will have the benefit of boosting near-term liquidity. This liquidity will to a small extent be absorbed by some planned bolt-on acquisition activity. MHP's financial profile will, however, improve as we expect increasing revenue and profit contribution from the first phase of the Vinnitsa project coming on stream adding 60,000 tonnes of chicken meat in 2013 of the planned 220,000 tonnes expansion by 2015. In addition, Fitch expects positive free cash flow for 2013 as capex declines. Therefore FFO adjusted net leverage is expected to reduce to below 2.8x by 2014 from a peak of 3.1x in 2012. MHP does not plan to start investments under the second phase of Vinnitsa until 2015.
Strong Business Model
MHP has the largest share of the Ukrainian poultry market. Its business model is supported by high vertical integration into grain sourcing and strong pricing power. However the group remains narrowly focused on Ukrainian poultry and sunflower oil as a by-product of animal feed production.
Currency Mismatch Still Material
There is a material, albeit improving, mismatch between MHP's debt (largely denominated in foreign currency), and profits that are mainly derived from domestic operations. However, MHP generates foreign currency from exporting sunflower oil, grain and frozen chicken (USD480m combined in 2012 or 34% of group sales). We expect increasing poultry exports once the new capacity additions come on stream in 2013. A potential depreciation of the local currency may facilitate an export-oriented strategy.
Positive: Future developments that could lead to positive rating actions for the Long-term local currency IDR include:
- Greater business diversification and/or scale (the latter boosted by a stronger and sustained export presence)
- Evidence of sustained positive free cash flow
- FFO adjusted net leverage consistently below 2x 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 for the Long-term local currency IDR include:
- FFO adjusted net leverage rising above 3x on a continuing basis due to sustained operational underperformance, aggressive capex plans or share buy-backs/dividends, or prompted by a sharper than expected depreciation of the hryvnia
- FFO fixed charge cover weakening below 4x