Fitch and S&P assign B+, B ratings for Kernel bonds

On February 20, Standard & Poor’s rating agency assingned Ukrainian sunflower oil producer Kenrel  (KER PW, KERPW) to B with a stable outlook. S&P also assigned a final B rating to Kernel’s USD 500 mln Eurobonds (one notch higher that Ukraine’s sovereign bonds rating).

S&P incorporated the following assumptions into the rating: stable to slightly declining agricultural commodity prices over the medium term, fully adjusted EBITDA margins of around 16%-18%, stable dividends at USD 20 mln, CapEx of about USD 100 mln in 2017, supporting the group’s organic growth in the grain and infrastructure divisions, including USD 35 mln of maintenance CapEx, plus a potential acquisition valued between USD 100 mln and USD 200 mln in 2017.

On February 21, Fitch Ratings also upgraded Kernel to B+ from B- with stable outlook citing an improved liquidity profile and debt refinancing. This is two notches higher that Ukraine’s sovereign bonds rating.

Fitch has also assigned Kernel’s USD 500 mln Eurobond a final rating of B+.  Fitch pointed to the improvement in Kernel’s liquidity profile and hard currency debt service cover after its refinancing of a substantial portion of its debt with the Eurobond proceeds.

Fitch expects Kernel’s CapEx to remain at USD 100 – 120 mln a year including the construction of new terminal capacity and expansion of its land bank by 150,000 ha, stable dividends at USD 20 mln a year, USD 70 mln – 80 mln of annual cash interested paid, and EBITDA of USD 255 mln – 285 mln a year.  Fitch has also stated that an upgrade of the Kernel ratings to BB is unlikely in the next three years.

Igor Zholonkivskyi: The final rating upgrades of both S&P and Fitch were expected as they followed the preliminary ranking upgrades announced in January. Since that time, there have been no fundamental changes in the market environment, which continues to look favorable for Kernel.  KERPW Eurobonds have slightly advanced following the placement, and are currently trading at around 103% of par, with a 7.8% to 8.0% yield which is lower than the 8.1% to 8.3% yield of the Ukraine sovereign Eurobond maturing in 2022. Kernel’s 1H17 interim financial results are expected to be published on Feb. 28, and is unlikely to bring any significant negative surprises as sunflower oil and grain prices have remained relatively stable during the last six months.

One important aspect that will have a significant impact on Kernel’s fundamentals is whether the company will be able to fulfill its planned sunflower seed crushing volumes in FY2017. There will be more clarity on this, as the 3QFY17 operating update will be released on April 20. Crushing volumes in 1HFY17 had declined 10.9% yoy due to an earlier sunflower seed supply deficit in Ukraine.  So far, our view on Kernel’s Eurobonds is neutral.