Moodys warns on possible downgrade of MHP bond rating

Moody’s placed on review for a downgrade the B3 corporate family rating of Ukraine’s leading poultry producer MHP (MHPSA), the agency reported on Dec. 10. Moody’s highlights that material depreciation of the Ukrainian currency, the hryvnia, could impact the company’s ability to service foreign-currency debt or its capex projects, as the bulk of MHP’s revenues are generated in the local currency. The agency could consider upgrading MHP’s rating if the company retains its adjusted EBITA margin above 25%, keeps free cash flow positive, keeps an adjusted debt/EBITDA ratio below 2.0x and a retains a cash flow/debt ratio above 30%.

Alexander Paraschiy: So far, it seems like MHP is performing in line with Moody’s expectations, reporting a 33% EBITDA margin in 2011 and 36% in 9M12 (or 31% and 32% respectively, if adjusted for IAS 41 gains). The company’s ratio of net debt to trailing 12M EBITDA amounted to 1.8x as of end-9M12 (and 1.9x if EBITDA is adjusted). Moreover, if the Ukrainian currency had depreciated 10% in late 2011, this ratio would be slightly below 2.0x, which is safe compared to 2.5x MHP’s bond covenant. In our view, Moody’s concerns are rooted in the reasons behind MHP’s current high profitability, which might not look sustainable: MHP’s key profit drivers in 2012 were constantly growing poultry prices (+20% yoy in 9M12) and booming grain sales on the 2011 bumper harvest. Sustainability of the latter is under risk on this season’s worse harvest, and MHP’s commissioning of new capacities would put strong poultry pricing in Ukraine under risk as well. On the other hand, we see the risk of MHP’s worsening financial ratios as minor: the company is set to increase its output in  2013 to improve its revenue and profit even if margins decrease, and the recently agreed upon opportunity to export poultry to EU would serve to both (1) raise MHP’s foreign-currency revenue (to decrease exposure to the hryvnia) and (2) soften possible oversupply of poultry on the local market.