Fitch upgrades Kernel and MHP on sovereign action

Fitch Ratings upgraded the credit ratings of Ukraine’s leading sunflower oil producer Kernel (KER PW) and Ukraine’s leading poultry producer MHP (MHPC LI, MHPSA) to sovereign level, the agency reported on Nov. 17. The ratings action followed Fitch’s upgrade of Ukraine’s sovereign rating on Nov. 11.

For Kernel, Fitch upgraded its foreign currency rating to B- from CCC, with a stable outlook. Its local currency rating was updated to B, or one notch above Ukraine’s rating (B-). This reflects the company’s limited reliance on Ukraine’s banking system and moderate dependence on the local operating environment, Fitch reported.

The long-term foreign and local currency rating of MHP was upgraded to B-, though with a negative outlook. Such an outlook reflects the weak liquidity position of MHP, its high foreign currency and refinancing risks, tight headroom under its Eurobond leverage covenant and a moderately aggressive financial policy, according to Fitch.

Igor Zholonkivskyi: The ratings upgrade for Kernel and MHP was an expected event and we believe it has already been discounted by the markets. At the same time, Fitch’s assessment confirms our neutral view on MHPSA bonds and bullish view on Kernel stock.

The difference in rating outlooks for Kernel and MHP looks reasonable due to the fact MHP is more exposed to the local market and the local currency. On top of that, MHP plans to increase CapEx by 50% yoy to USD 150 mln in 2017 in order to boost production capacities at its Vinnytsia poultry farm and will attempt to refinance its 2020 Eurobonds during 2017-2018.

According to MHP’s 9M16 financial report, its net debt/LTM EBITDA ratio increased to 2.82x as of Sept. 30 from 2.66x as of Dec. 30, 2015, which is very close to MHP’s Eurobond covenant of 3.0x. If breached, the covenant would prevent MHP from raising new debt. Nevertheless, we think MHP’s current financial position is quite solid and the company should benefit from the gradual recovery of the Ukrainian economy in 2017.