Fitch Ratings has affirmed Ukraine-based poultry and agricultural producer MHP S.A.'s Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'CCC', Fitch has said in its press release.
“MHP”s Long-Term Foreign Currency IDR remains constrained by Ukraine’s Country Ceiling of ‘CCC’,” Fitch said.
The Long-Term Local Currency IDR is pressured by the company’s weak liquidity position, its exposure to the Ukrainian economy, high FX and refinancing risks, as well as tight headroom under the eurobond leverage covenant and a moderately aggressive financial policy. At the same time, MHP’s robust business model and growing exports are positive for its credit profile, Fitch said.
Fitch forecasts that MHP’s net debt to EBITDA ratio may exceed the company’s eurobond debt covenant threshold of 3.0x in 2016 and remain above this level in 2017-2018 due to the projection of a decrease in EBITDA and limited scope for debt reduction, assuming large investments under second stage of Vinnytsia project and high dividends.
“However, this leverage level will not trigger a covenant breach as long as the company does not incur additional debt in excess of $160 million, which is allowed, depending on its purpose, in the eurobond documentation,” Fitch said.
“We project MHP’s EBITDA will drop to around $370 million in 2016 (2015: $437 million) due to weakening average poultry selling prices, higher production costs and a reduction in VAT retained under the special VAT regime following changes in legislation effective from 2016. Our expectation of a further reduction in EBITDA to around $350 million in 2017 is due to the full cancellation of the special VAT regime for agricultural producers and our conservative view on crop yields and international poultry and grain prices. Unless international selling prices recover or crop yields improve sustainably, a meaningful recovery of MHP’s EBITDA will only be achievable from investments in expansion of poultry production capacity or land bank,” Fitch said.
A material FX mismatch continues to weigh on MHP’s credit profile as the company’s debt is in US dollars and euros, while hard-currency profits are only at around 30 percent of the group’s EBITDA, according to our estimates. Poultry export volumes have increased rapidly (31 percent year-over-year in 1H16), but falling international poultry prices constrain growth in hard currency proceeds, Fitch said.
Fitch’s key assumptions within our rating case for the issuer include – UAH/USD at 25.5 in 2016, 28.0 in 2017 and 30.5 in 2018-2019.
