May 1 (The following statement was released by the rating agency)
Fitch Ratings has affirmed Agribusiness Holding Miratorg LLC's (Miratorg) Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'B' and its National Long-term rating at 'BBB(rus)'. The Outlooks are Stable. Fitch has also upgraded Miratorg Finance LLC's senior unsecured rating to 'B' from 'B-'. A full list of rating actions is below.
The affirmation reflects Miratorg's strong operating and financial performance in 2012 following the full-year contribution of new production capacities. We expect profit margins to remain strong in 2013, which together with more muted capex should help Miratorg to turn FCF positive. More conservative mid-term growth plans and management's commitment to deleveraging beyond 2013, if confirmed, could positively affect the ratings. However, debt-funded growth (including a guarantee provided to poultry project financing) and ongoing changes in consolidation scope, prevent any positive rating action until there is greater clarity on the group's future structure and liabilities position.
KEY RATING DRIVERS
Strong Performance in FY12
Miratorg exceeded Fitch's expectations in FY12 due to a new pig breeding production facility, and good momentum across all business segments including the start-up operations of Concordia (its convenience food production plant in Kaliningrad has not been commissioned). Despite the expected pricing pressure resulting from the possible effect of imports following Russia's access to the WTO, we view the achievement of 2013 projected sales and profit growth targets as bearing moderate risk. Together with positive free cash flow, we expect Miratorg should be able to delever and show credit metrics commensurate with a higher rating by 2015.
Miratorg continues to enjoy vertical integration that covers most of the production and distribution cycle. This smoothes any volatility of the operating margin by absorbing the movements of prices for raw materials used for production. It also enhances the quality of earnings due to Miratorg's downstream move in the value chain. This is a positive rating factor relative to non-integrated protein producers in the US, such as Tyson (BBB/Positive), and Brazil, such as JBS (BB-/Stable) or Minerva (B+/Stable).
Dependence on Government Regulation
Miratorg's distribution business is already benefiting from the reduction in import duties within quotas as it holds the number one position in pork imports. Longer term, increased competition and dependence on state support (including any protective measures post-WTO) could introduce some volatility in future sales and profits. Miratorg's leading positions in different segments of the meat market, its vertical integration strategy along with economies of scale mitigate part of the sector risks, placing it favourably relative to non-integrated and inefficient meat producers, mainly households, who are expected to gradually exit the market.
Changes in Consolidation Scope
Miratorg has made progress towards simplifying its group structure by consolidating the Concordia and fodder plant. We expect the changes in consolidation to result in enhanced quality of earnings. However, this also reflects the inability to assess like-for-like performance. In poultry, where investments are funded by an eight-year RUB15bn loan with a three-year grace period (until May 2014) Miratorg provides a guarantee on a project finance basis. Although Fitch considers the risk of guarantee claims as low, we nonetheless take this contingent liability into account while recognising that poultry is only expected to ramp up its operations next year and become profitable in 2015.
FFO adjusted net leverage sits now at 3.9x (FY12) and is expected to remain around 4x in FY13 as Miratorg finalises its current expansion phase, including a RUB8bn estimated disbursement as settlement with the related-party regarding Concordia. Thereafter we assume de-leveraging to below 3x, a level consistent with a higher rating. However, this calculation excludes the effect of poultry debt and profits after FY14.
Weak Liquidity But Improving
The rating reflects the group's weak liquidity profile, due to material working capital investments required by the growing business scope, and thus its high refinancing risk with RUB24bn coming due in 2013. This is mitigated by Miratorg's strong and long-standing relationships with many state-owned Russian banks and access to the domestic RUB bond market as demonstrated by the most recent RUB5bn bond issue and expected positive FCF (around 10% of sales in FY13, rising further next year).
Enhanced Bond Structure, Lower Secured Indebtedness
The new RUB5bn bond is guaranteed by Agri Business Holding Miratorg LLC, similarly to the existing bond. Although the new bond enjoys a surety from TK "Miratorg", the largest revenue generator of the group, it also contains a cross-default provision with other group entities. The existing bond has a put option in case of any default or overdue liabilities of the issuer; therefore the existing bondholders will have recourse on the holding company in case of default under the new bonds thereby mitigating any structural subordination concerns. Also both bonds will rank equally behind a lower proportion of secured debt relative to the post restructuring EBITDA estimation resulting in average recovery prospects in case of default, at 'B'/'RR4' for the senior unsecured rating and a local currency senior unsecured national rating at 'BBB(rus)'/'RR4'.
Positive: Future developments that could lead to positive rating actions include:
- Gross FFO leverage below 3.5x (excluding poultry).
- FFO fixed charge cover above 3x.
- Evidence of positive FCF and poultry operations coming on stream as planned diminishing (or eliminating) the risk of call on guarantees by 2014.
Negative: Future developments that could lead to negative rating action include:
- Gross FFO leverage consistently toward 5x or worse (excluding poultry)
- FFO fixed charge cover below 2x
- Free cash flow consistently negative (double-digit or worse) and sustainable deterioration in EBITDA margin.
The rating actions are as follows:
Long-term foreign and local currency IDRs affirmed at 'B'; Outlook Stable
National Long-term rating affirmed at 'BBB(rus)'; Outlook Stable
Miratorg Finance LLC
RUB3bn three-year notes due July 2014:
Foreign currency senior unsecured rating: upgraded to 'B/RR4' from 'B-'/RR5
Local currency senior unsecured national rating: upgraded to 'BBB(rus)' from 'BB(rus)'
RUB5bn three-year notes due April 2016 (issued 24 April 2013):
Foreign currency senior unsecured rating: assigned 'B'/'RR4'
Local currency senior unsecured national rating: assigned 'BBB(rus)'