OREANDA-NEWS. 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'. A full list of rating actions is below.

The ratings reflect the political and economic uncertainty in Ukraine, where MHP's assets and operations are based, which may threaten the company's financial flexibility and ability to meet its debt obligations. Therefore, MHP"s Long-Term Foreign Currency IDR remains constrained by Ukraine's Country Ceiling of 'CCC'. 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.


Tight Headroom under Eurobond Covenant

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 our 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 USD160m, which is allowed, depending on its purpose, in the Eurobond documentation. In addition, there are differences between Fitch's approach to the EBITDA calculation and the Eurobond documentation. However, in our view the tight headroom under the covenant exacerbates risks to MHP's access to external liquidity in the context of the company's large amount of short term debt (USD273m as of end June 2016).

EBITDA Reduction

We project MHP's EBITDA will drop to around USD370m in 2016 (2015: USD437m) 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 USD350m 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.

Aggressive Financial Policy

The company increased dividends this year despite an expected reduction in profits in 2016, and maintained its plans for sizeable investments in new poultry production lines in the Vinnytsia poultry complex. We view the lack of cash preservation measures as negative for MHP's ratings but the company's flexibility in future dividends and expansion capex provide some room for managing free cash flow (FCF) to avoid a Eurobond leverage covenant breach.

Strong Business Model

We expect MHP to retain its strong market position as the leading poultry and convenience food and processed meat producer in Ukraine thanks to its larger scale, better access to bank financing and higher degree of vertical integration than its local competitors. Growing exports (1H16: 48% of revenue) and the company's ability to expand and diversify export markets are other strong drivers of MHP's business profile.

Material FX Mismatch

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% of the group's EBITDA, according to our estimates. Poultry export volumes have increased rapidly (31% yoy in 1H16), but falling international poultry prices constrain growth in hard currency proceeds.

Average Recoveries for Unsecured Bondholders

The senior unsecured rating is in line with MHP's Long-Term IDR of 'CCC', reflecting average recovery prospects given default. The Eurobond is issued by the holding company MHP S. A, while the rest of the unsecured debt is raised primarily by operating companies, but there are no subordination issues as the Eurobond is covered by suretyships from operating companies, altogether accounting for around 85% of the group's 2015 EBITDA.

Parent-Subsidiary Linkage

The Long-Term IDR's of OJSC Myronivsky Hliboproduct, MHP S. A.'s 95.4% owned subsidiary, are equalised with those of the parent due to strong strategic and legal ties between the companies. Myronivsky Hliboproduct is a marketing and sales company for goods produced by the group in Ukraine. Strong legal linkage with the rest of the group is ensured by the presence of cross-default/cross-acceleration provisions in Myronivsky Hliboproduct's major loan agreements and suretyships from operating companies generating a substantial portion of the group's EBITDA.


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

- Domestic poultry prices growth lagging behind Ukraine's CPI

- Lower grain, sunflower oil and international poultry prices in FY16 and stable thereafter

- Full cancellation of the special VAT regime for agricultural producers from 2017

- Construction of new production capacity, leading to capex at 15%-20% of revenue in 2017-2018

- EBITDA margin within 28%-32% in 2016-2019

- Annual dividends not exceeding USD80m in 2016-2019

- No M&A


Future Developments That May, Individually or Collectively, Lead to a Positive Rating Action

An upgrade of the Long-Term Local Currency IDR would only be possible if Fitch considers there has been a sustained improvement in the issuer's operating environment and liquidity position. An upgrade of the Long-Term Foreign Currency IDR would only be possible if Ukraine's Country Ceiling was raised.

Future Developments That May, Individually or Collectively, Lead to a Negative Rating Action

- A liquidity shortage caused by worsened access to bank financing or by refinancing at more onerous terms than expected.

- Further significant hryvnia depreciation, sustained operational underperformance or larger-than-expected capex and dividends resulting in material weakening of MHP's credit metrics and breach of Eurobond leverage covenant.


Weak Liquidity

As at end-June 2016 MHP's Fitch-adjusted cash balances of USD22m, undrawn committed lines of USD18m and expected FCF were insufficient to cover USD273m of short-term debt. USD127m of short-term debt was related to working capital facilities, which are usually renewed annually.



Long-Term Foreign Currency IDR: affirmed at 'CCC'

Long-Term Local Currency IDR: affirmed at 'CCC'

Foreign currency senior unsecured rating: affirmed at 'CCC'; Recovery Rating of 'RR4'

OJSC Myronivsky Hliboproduct

Long-Term Foreign Currency IDR: affirmed at 'CCC'

Long-Term Local Currency IDR: affirmed at 'CCC'

National Long-Term rating: affirmed at 'A+(ukr)', Stable Outlook