1 Nov 2010 16:40

Fitch rates Ukraine's Mriya at 'B-'; Outlook Stable

MOSCOW. Nov 1 (Interfax) - On Monday, Fitch Ratings assigned Mriya Agro Holding Public Limited (Mriya) Long-term foreign and local currency Issuer Default Ratings (IDRs) of 'B-' respectively. The outlook on the Long-term IDRs is stable. A full rating breakdown is provided at the end of this commentary, the agency said in a statement.

The statement said: "Fitch Ratings has also assigned Mriya's planned USD300m notes an expected rating of 'B-' and an expected recovery rating of 'RR4'. The final ratings on the notes are contingent upon the receipt of final documents conforming to information already received by Fitch.

"The Long-term IDRs reflect Mriya's above-average business risks, due to the strong cyclicality and seasonality of agricultural commodities, its reliance on one geographic area in Ukraine, its relative small size and execution risk stemming from the management's rapid growth agenda. These factors are, however, mitigated by the long-term growth prospects for the agricultural sector in Ukraine and Mriya's comparatively high output yields relative to peers and independent farmers. Mriya's yields are driven by its vertical integration into seed processing and storage capacity, adequate crop planning and economies of scale.

"The ratings also take into account Mriya's diversification across different crops and its presence in western Ukraine, where weather conditions have proved more stable for growing crops than in other parts of the country. Such factors reduce potential volatility in production volumes, crop yields and working capital stemming from factors outside of management's control, such as adverse weather conditions and/or abrupt changes in selling prices.

"The group's financial risk is considered average for the assigned ratings level. Fitch understands that the proceeds of the USD300m notes will be used to finance a rapid expansion plan which is likely to translate into negative free cash flow at least for 2010 and 2011, and to refinance existing bank loans. Fitch acknowledges the high degree of flexibility in the capital spending programme which provides a buffer against unfavourable market trends. Management's commitment to maintain a maximum unadjusted net debt/EBITDA ratio of 2.5x (throughout the year) and adequate cash balances, together with new USD50m committed facilities from IFC, provide further support to the ratings.

"The planned notes are unsecured, subordinated obligations of Mriya and benefit from guarantees (which are suretyships under Ukrainian law) from certain subsidiaries of the Mriya Group that account for at least 80% of the aggregate combined EBITDA, net assets and net income of the Group respectively. The terms of the notes contain limitations on incurring additional indebtedness based on a net debt/EBITDA ratio of less than 3.0x. The draft bond indenture also includes restrictions on dividends and asset disposals. Note holders also benefit from a put option at 101 (1% over par) upon a change of control event and cross-default with other debt borrowed by the issuer or any of its restricted subsidiaries, above a minimum threshold of USD10m.

"Mriya is a leading agricultural producer in Ukraine focusing on crop cultivation that is headquartered in the Ternopil region. As of end-June 2010, Mriya had 218,000 hectares of land under management. In 2009, Mriya generated operating revenues and EBITDA (excluding gains arising from changes in fair value on agricultural produce and biological assets net of cost of sales) of USD148m and USD89m respectively, the latter after USD16.2m government grants, mainly VAT rebates (59.9% EBITDA margin).

"Positive rating factors would include a demonstrated ability to maintain high profit margins despite Mriya's aggressive growth strategy, gross lease-adjusted leverage being maintained between 1.5x-2x (on a rolling two-year basis), increased scale and geographic spread of the operations, evidence of sustained positive free cash flow generation and the full application of corporate governance best practices - such as board independence, increased transparency and limits on inter-company transactions.

"A negative rating action could follow from sustained declining profitability, gross lease-adjusted leverage above 4.0x (on a rolling two-year basis), and/or consistently negative free cash flow generation eroding liquidity below the minimum level required to fund seasonal working capital needs.


Long-term foreign and local currency IDRs 'B-'; Outlook Stable

Short-term foreign and local currency IDRs 'B'

National Long-term Rating 'BBB'(ukr); Outlook Stable"