Fitch Affirms Ukraine's MHP S.A. at 'CCC'


Fitch Ratings-Moscow/London-17 September 2015: Fitch Ratings has affirmed Ukraine-based poultry and agricultural producer MHP S.A.'s (MHP) Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'CCC'. A full list of rating actions is below.

The affirmation reflects the political and economic uncertainty in Ukraine, where MHP's assets and operations are based, and which may threaten the company's financial flexibility and ability to meet its debt obligations. High reliance on the domestic market and exposure to FX and refinancing risk keep the ratings constrained by the Ukraine's Country Ceiling 'CCC'. At the same time, in 2014 and 1H15 MHP demonstrated resilience to the political and economic turmoil in Ukraine due to its vertically integrated business model, leading market position in Ukraine and growing exports.


Country Ceiling Constraint

MHP's IDRs remain constrained by Ukraine's Country Ceiling and local currency rating due to the company's high proportion of domestic sales and material FX risks. Without the Country Ceiling constraint, MHP's business and financial profile would allow its ratings to return to the 'B' category.

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 (1H15: 44% 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

MHP's exports are growing but hard-currency profits, which we estimate at around 30% of EBITDA, are still insufficient to fully mitigate FX risks as all of the company's debt is in hard currency. Material FX mismatch will continue to weigh on MHP's credit profile, although 2014 and 1H15 performance proved that the company's vertically integrated business model and ability to increase domestic selling prices and grow exports enabled it to contain a decline in revenues and profits amid currency headwinds.

EBITDA Reduction

We expect EBITDA to drop to around USD450m in 2015 (2014: USD502m) as the impact of hrivnya depreciation on domestic revenues will be stronger than benefits from lower grain production costs. These costs were fixed in hrivnya at end-2014 before the exchange rate surged. A further reduction in EBITDA to around USD400m in 2016-2017 is premised on growth in USD-linked costs and to a greater extent on our assumption of cancellation of special VAT regime for agriproducers from 2016, as requested by the IMF but not yet enacted by Ukraine's government. MHP's income arising from the difference in VAT on sales and purchases was 11% and 18% of 1H15 and 2014 EBITDA, respectively.

Higher Leverage

After a drop to 2.3x in 2014, we expect funds from operations (FFO) adjusted leverage to increase to 2.9x in 2015 and peak at 3.8x in 2016-2017 due to lower EBITDA, large investments in new production capacity and land bank expansion, and dividends, which can be up to 50% of net income. Our projections do not include a potential purchase of a European poultry producer, which the company may undertake if it finds an appropriate target.

Fitch-estimated FFO adjusted leverage ratios in 2016-2017 will correspond to a net debt to EBITDA ratio slightly above the Eurobond covenant of 3.0x. However, we expect management to undertake cash preservation measures, especially in the event of cancellation of the special VAT regime, which we understand is not currently assumed in the company's budget but factored into our projections.

Adequate Recoveries for Unsecured Bondholders

The senior unsecured rating is in line with MHP's Long-term IDR of 'CCC', reflecting superior recovery prospects given default, capped at 'RR4' for the Ukraine jurisdiction. Although the Eurobond is issued by the holding company MHP S.A, while the rest of the unsecured debt is raised primarily by operating companies, no subordination issues exist as the Eurobond is covered by suretyships from operating companies, altogether accounting for around 90% of the group's EBITDA in 2014.

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 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 the rating case for the issuer include:

- UAH/ USD at 22 in 2015-2016

- Increases in domestic poultry prices lagging behind Ukraine's CPI

- No recovery in grain and sunflower oil prices

- Cancellation of the special VAT regime for agricultural producers from 2016

- EBITDA margin within 28%-30% in 2016-2018 vs. 39% projected in 2015 (2014: 36%)

- Capex at 14%-20% of sales in 2015-2017

- Annual dividends not exceeding USD50m-USD90m in 2016-2018

- No M&A

- Adequate liquidity


Positive: An upgrade of the local currency IDR would only be possible if Fitch considers there has been a sustained improvement in the issuer's operating environment. An upgrade of the foreign currency IDR would only be possible if Ukraine's Country Ceiling was raised.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

- Liquidity shortage caused by limited available bank financing of working capital investments 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.


Weak but Manageable Liquidity

As at end-June 2015 MHP had Fitch-adjusted cash balances of USD56m and undrawn committed lines of USD35m, which were insufficient to cover USD190m of short-term debt and expected negative free cash flow. USD104m of short-term debt was related to working capital facilities, which are usually renewed annually. We expect the company to succeed in its ongoing negotiations on extension and refinancing of its short-term maturities, given its strong credit profile and track record of debt refinancing, including USD235m Eurobond in April 2015.



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 (MHP S.A.'s 95.4% owned subsidiary)

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



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