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Fitch Places Avangardco's Local Currency IDR of 'B' on RWP; Affirms Unsecured Rating at 'B'
March 12, 2013 / 4:46 PM / 5 years ago

Fitch Places Avangardco's Local Currency IDR of 'B' on RWP; Affirms Unsecured Rating at 'B'

(The following statement was released by the rating agency) LONDON/MOSCOW, March 12 (Fitch) Fitch Ratings has taken the following rating actions on Avangardco Investments Public Limited's (Avangardco) ratings: - Long-term foreign currency Issuer Default Rating (IDR) affirmed at 'B' with Stable Outlook - Long-term local currency IDR of 'B' placed on Rating Watch Positive (RWP) - National long-term Rating of 'A+(ukr)' placed on RWP - Foreign currency senior unsecured rating affirmed at 'B' and Recovery Rating affirmed at 'RR4' These rating actions follow the announcement that Avangardco's key operating subsidiaries will provide an unconditional and irrevocable suretyship on a joint and several basis to its parent's UkrLandFarming PLC (ULF) proposed new Eurobond issue (see "Fitch Assigns 'B(EXP)' to UkrLandFarming PLC's Planned Bond Issue" dated 12 March 2013 at, and therefore the closer legal ties between Avangardco and its parent, which adds to the strategic importance of Avangardco to the whole group. KEY RATING DRIVERS Local Currency IDR expected to be equalised with its Parent's Fitch expects to upgrade Avangardco's local currency (LC) IDR to 'B+' upon completion of ULF's bond placement and confirmation of greater legal ties stemming from cross-default clauses and a debt guarantee structure binding the consolidated group together. Strategic ties are expected to remain strong, with Avangardco providing ULF substantial revenue and profit diversification, being an integral part to ULF's strategy of increasing its presence across the agricultural value chain. Fitch acknowledges that Avangardco's management teams and treasury functions remain separated from ULF and that trading relations between the two companies are limited. Standalone profile consistent with a 'B+' LC rating On a standalone basis, Avangardco's local currency IDR would also support a 'B+' rating in Fitch's view reflecting its scale and leading market position, including a rising export presence, low leverage and finalisation of the key expansion phase, diminishing related-party transactions aside from USD12m of cash maintained in related-party banks (6% of the group's reported cash and cash equivalents) as of end December 2012. Further scope for an upgrade of Avangardco's LC IDR would however be constrained by ULF's rating level and is ultimately dependant on ULF and Avangardco's efforts to embrace greater transparency and adherence to high-standard corporate governance practices. Weak Diversification, Strong Market Positions Limited diversification beyond its two main product lines of eggs and egg products weighs negatively on Avangardco's business profile. Despite its dominance in the domestic industrialised egg market, limited scope for organic growth exists in Ukraine, with the exception of dry or liquid egg products for prepared meals or other value-added product lines. Fitch however recognises Avangardco's leadership as the number one egg producer in Eurasia, and a leading player globally. Exports Critical to Strategy In 2012 exports represented 20% of group sales, approximately USD128m. Avangardco is somewhat reliant on export markets to channel increased expected egg production due to the limited upside in the domestic market. The main export markets remain North Africa, the Middle East and Asia; however there are further opportunities from the EU's recent decision to open its egg and poultry market to imports from Ukraine (albeit subject to import tariffs). This should contribute to the group's focus on exports while allowing greater diversification of sales by channel and destination. High Profitability under Pressure Avangardco reported a strong EBITDA margin in 2012 of 39.8%, only 100bp lower than 2011 despite high grain prices reflecting the group's early purchasing of grain, partnerships with local farmers and adequate pricing power. High prices of corn and oilseeds, if combined with failure to channel additional production capacity externally could create overcapacity in the domestic egg market and downward price pressure causing erosion of profit margins. Improving Financial Flexibility As expected free cash flow (FCF) has been negative in 2012 (USD69m) due to high capex of USD322m in the first stage of the expansion capacity at Avis, Chornobaivske, and Imperovo Foods. Fitch expects funds from operations (FFO) adjusted gross leverage to decline gradually towards 1x by end-2014 from 1.4x in 2012. Moderate leverage along with expected positive free cash generation, especially from 2014 will increase Avangardco's financial flexibility. Limited Impact from Guarantee to ULF on Avangardco's Bondholders The announcement made by the company that it will provide an unconditional and irrevocable suretyship on a joint and several basis to its parent's planned new Eurobond issue is considered neutral for Avangardco's unsecured creditors. Previously Fitch had stated that Avangardco's low leverage, with very low secured debt, and an expanding asset base were reflected into superior recovery prospects for bondholders. Fitch estimates that, even including the burden of the new guarantee (estimated for the amount of the planned new bond for ULF at USD500m) as a contingent liability, net leverage would be 2.7x; this is below Avangardco's debt incurrence maximum leverage test of 3x. In this case, Fitch still expects above-average recovery prospects for unsecured creditors at Avangardco level, capped at 'RR4' (31%-50%) for the Ukraine jurisdiction, hence the affirmation of the foreign currency senior unsecured rating at 'B'. RATINGS SENSITIVITIES The following developments would lead to Fitch's resolution of the Rating Watch Positive on the Local Currency Long-term IDR and the Long-term National Rating with an upgrade respectively to 'B+' and 'AA+(ukr)': - Confirmation of strengthening legal ties between Avangardco and ULF. - Confirmation that conservative financial policies, enabling Avangardco to generate positive FCF and a strong financial flexibility would be maintained. An upgrade of the foreign currency IDR would be possible only if Ukraine's Country Ceiling was upgraded (currently 'B'). Negative: Future developments that could lead to negative rating action include: - An increase in FFO adjusted leverage (gross) to 3.0x (both for ULF and Avangardco) on a continuing basis - FFO fixed charge cover weakening below 4x - Diminishing liquidity cushion ahead of the maturity of its Eurobond due in October 2015 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:; 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. 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 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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