Fitch rates Mriya's unsecured bond issue at 'B'/'RR4'
MOSCOW. April 22 (Interfax) - Fitch Ratings has assigned Mriya Agro Holding Public Limited's (Mriya; 'B'/Stable; 'A-(ukr)'/Stable) USD400m 9.45% Eurobond a final senior unsecured rating of 'B' with a Recovery Rating of 'RR4', the agency said in a press release.
Fitch expects the bond issue proceeds will help extend the group's debt maturity profile while boosting general liquidity to support further business growth.
The rating action follows the review of the final terms of the bond issue conforming to information already received by Fitch.
Some of the proceeds of the new issue will be applied to finance a tender offer for a portion of the existing USD250m senior notes due 2016 (around USD178m as of 10 April 2013), which will help phase out the group's debt maturities. In addition, Fitch understands that the remaining proceeds will be applied to repaying other debt facilities, capex and boosting liquidity to support working capital swings throughout the year. We do not expect changes in Mriya's dividend policy and assume no dividends will be paid out from bond proceeds.
The new notes rank as senior unsecured obligations, and benefit from upstream guarantees (which are suretyships under Ukrainian law) from several operating subsidiaries representing a minimum of 80% of EBITDA, net income and net assets of the group. The terms of the new notes are substantially the same as the terms of the existing notes, including a debt incurrence covenant based on a net debt/EBITDA of less than 3x. Bondholders are protected by a cross-default with any indebtedness of the issuer, the sureties or any material subsidiary above the threshold of USD10m.
Given the level of investments and growing asset base, Fitch's recovery analysis indicates higher recoveries for creditors arising from the liquidation. Unsecured creditors' recoveries are supported by limited senior indebtedness, thus unsecured creditors are expected to obtain at least 50% recovery for their claims in line with the soft-cap of 'RR4' applied by Fitch for the Ukrainian jurisdiction.
Mriya delivered outstanding revenue growth in 2012 while keeping the funds from operations (FFO) margin above 40%. Depending on the future pace of land bank expansion, we assume somewhat slower revenue growth in 2013 and 2014 as we do not envisage a further dramatic improvement in crop yields while soft commodity prices will remain volatile. Fitch expects an FFO margin at or above 40%, which is healthy for the rating, supported by investments in logistics and infrastructure (silos).
Mriya conducted heavy investments in 2012 in storage facility construction and logistic fleet expansion that will enable the group to enhance its existing operations' efficiency. The current rating factors in annual capex between USD150m and USD180m (averaging around 40% of sales), a combination of further land lease rights and additional infrastructure. Therefore Fitch assumes gradual deleveraging with FFO adjusted net leverage remaining between 2x and 2.5x by 2016 (2012: 2.5x), consistent with a 'B' rating for the sector.
The bond issue will improve Mriya's liquidity profile and allow an extension of the average debt maturity by around two years. Despite high capex in 2012, even prior to the planned bond placement and partial refinancing, Mriya had cash, liquid inventories and account receivables totalling USD280m by end-December 2012. This level of liquid assets, excluding any committed bank lines, is sufficient to fund its working capital cycle (equating to USD140m swing from peak to trough or 0.7x-0.8x EBITDA intra-year).
Relative to other Ukrainian peers, such as Kernel and MHP, Mriya's corporate governance is still weak, albeit scoring better than UkrLandFarming. Mriya maintains related party transactions in relation to all of its sugar beet production (this represented 16% of Mriya's total revenues in 2012; 40% in 2011). This decline is a positive sign. However, we consider that it may be not sustainable as it is partly driven by weak environment in Ukraine's sugar market. We do not expect the bond proceeds to fund any loans to the sugar processing business. Although this is a constraining factor for a future positive rating development, Fitch understands the sugar companies owned by the controlling shareholder do not have meaningful financial debt as they have no major capital spending plans.
Future developments that could lead to positive rating actions include:
- Contraction of related party transactions or full consolidation of the sugar business into the group.
- Evidence of positive or at least only moderately negative FCF margin.
The above factors would have to be accompanied by at least two of the following triggers:
- FFO margin above 35% or FFO above USD200m in absolute terms.
- FFO adjusted net leverage below 1.5x (and below 2.5x at peak throughout the year).
- FFO fixed charge coverage consistently above 4.5x.
- Maintained strong liquidity - available cash, committed available bank lines and expected next year's CFO less maintenance capex covering at least 150% of short-term debt maturities.
Future developments that could lead to negative rating action include:
- Declining profitability driven by sustained cost increases and/or yield erosion bringing FFO
margin down to the 25%-30% range.
- Weaker liquidity profile.
- FFO adjusted net leverage consistently above 2.5x at year-end (or 3.5x at the peak during the year).
- FFO fixed charge below 3x.
