S&P assigns preliminary ‘B’ rating to planned Kernel Eurobond debut

Standard & Poor’s Ratings said on Jan. 18 it has assigned preliminary ‘B’ rating for the planned Eurobond debut of Ukraine’s largest sunflower oil producer Kernel (KER PW). This is one notch above Ukraine’s sovereign rating. Recall that the day before, Fitch Ratings assigned Kernel’s planned Eurobond a rating of B+ (EXP), or two notches above Ukraine’s sovereign rating.

Igor Zholonkivskyi: Based on our estimates, the current weighted average of Kernel’s USD-denominated cost of debt stands close to 9.0%. As of end-September 2016, Kernel’s total debt stood at USD 336 mln, out of which 273 mln was reported as short-term debt. In case Kernel manages to finalize its Eurobond debut deal as planned (with the maximum at USD 650 mln), it should allow the company to refinance its outstanding short-term debt at a lower interest rate. It will also create a financial cushion in case the company proceeds as planned with greenfield construction of a deepwater transshipment facility as part of its business target to double its grain exports by 2019.

Taking into account the expected ratings and the prevailing corresponding market yields, we expect the yield for the planned Eurobond issue to be in the 6.5%-7.5% range, which is going to be lower than the current Ukraine sovereign five-year yield of 8.1%.

We think the lower than sovereign yield is justified as the company has a very low net debt/LTM EBITDA ratio at 0.87x (as of end-September 2016) and has more than 80% of its EBITDA generated from FCY-denominated exports, which effectively mitigates the company’s ForEx risks.