Fitch affirms BB- rating, Stable outlook for Kernel

Fitch Ratings affirmed on Sept. 18 the long-term
issuer default rating of Ukrainian sunflower oil producer and grain trader
Kernel (KER PW, KERPW) at BB- with a Stable outlook. The rating’s affirmation
reflected the agency’s view about Kernel’s high share of export revenues and
expectation that the company will continue to refinance its upcoming debt
maturities.

Also, the agency estimates Kernel’s EBITDA has reached
USD 412 mln in FY2020 (up 19% yoy), supported by a record-high sunflower seed
harvest in the last season and higher average sunflower oil prices. And the
agency expects that the high EBITDA will allow Kernel to avoid a temporary
leverage hike in FY2020 and smooth out the impact of spending on its leverage
by FY2021. The agency projects positive FCF after FY2022 due to CapEx reduction
and boosted profits, supported by new facilities’ operations.

Andriy Perederey: Kernel’s
rating affirmation is based on Fitch’s expectation of improved leverage metrics
owing to higher EBITDA in FY2020 and FY2021, while the company will continue
its CapEx spending in this period. The improvement of Kernel’s leverage would
help the company to refinance maturing debts, while the strong expected returns
from its investments in FY2022.

We estimate that Kernel’s EBITDA reached USD
380-390 mln in FY2020 (5-8% below Fitch’s estimate). Kernel’s net
debt-to-EBITDA was 3.5x at the end of March 2020 (3QFY20). We expect that the
company’s vegetable oil segment will support its financials in FY2021 due to
improved crushing margins. But worsening weather conditions and lower crop
yields in the 2020 harvest season in Ukraine will have a negative effect on the
company’s farming and infrastructure segments in FY2021, which generated more
than half of its EBITDA last year. Therefore, there is a risk that Kernel’s
leverage won’t decrease significantly in the near term. We are maintaining our
neutral view on KERPW bonds.