March 21 (SeeNews) - Fitch Ratings said it has assigned Moldovan agricultural commodity trader and processor Aragvi Holding International Limited's (Trans-Oil) first-time expected long-term foreign and local currency issuer default ratings (IDRs) of 'B(EXP)' with a stable outlook.
In addition, Fitch has assigned the 'B(EXP)'/'RR4'/41% senior secured rating on Trans-Oil's proposed five-year Eurobond, which is to be issued by Trans-Oil's 100%-owned subsidiary Aragvi Finance International DAC, the rating agency said in a statement on Wednesday evening.
In a separate statement on Wednesday, Standard & Poor's assigned a preliminary 'B-' ratings to Trans-Oil and its proposed U.S. dollar-denominated senior secured Eurobond.
You can download the 2023 Agriculture industry in Southeast Europe report here
Fitch also said in the statement:
"The assignment of final ratings is contingent on the successful placement of Eurobond and refinancing of the group's short-term debt maturities. Final documents should conform to information already received.
The ratings are constrained by Trans-Oil's small scale in the global agricultural commodity processing and trading market and the concentration of its crops origination in Moldova. The ratings also reflect Trans-Oil's dominant and well-protected market position in agricultural exports and sunflower seed crushing in Moldova and our expectation that the company will continue expanding its EBITDA over the next four years, while maintaining moderate leverage. We also expect a substantial strengthening in the group's financial flexibility after placement of the Eurobond and refinancing of short-term maturities.
KEY RATING DRIVERS
Strong Market Position in Moldova: The ratings of Trans-Oil are underpinned by its dominant market position in Moldova's agricultural exports and sunflower seed crushing. In the fiscal year ended June 2018 Trans-Oil exported 57% of agricultural commodities in Moldova and accounted for 70% and 95% respectively of sunflower seeds originated and crushed in the country.
Ownership of material infrastructure assets is Trans-Oil's major competitive advantage as the company operates the largest inland silo network and the only seagoing vessel port facility in the country. This asset-heavy business model and its strong shares in its procurement market result in Trans-Oil's higher profit margins than most Fitch-rated peers in the sector.
Low to Moderate Competition Risks: Trans-Oil's dominant market position creates substantial market entry barriers for new competitors and ensures the company's smooth access to crops procurement in the country. Due to its market position in Moldova, Trans-Oil benefits from significantly lower competition risks in procuring crops than its peers operating in Russia and Ukraine, two other crop-producing countries in Black Sea region. This is due to higher market consolidation and the absence of international commodity traders and processors in Moldova. Fitch does not expect the competitive environment in Moldova to change materially over the medium term.
On the other hand, Trans-Oil is a small player on the international commodity trading markets, sourcing from a country that contributes only a small portion of globally traded wheat, corn and sunflower seeds and oil and which has no direct access to the sea. This aspect is mitigated by Trans-Oil's strategy of focusing on selling directly to end-users, mainly in the Mediterranean basin.
Small Scale, Limited Diversification: The ratings of Trans-Oil are constrained by its small scale and concentration of crops procurement in Moldova, which exposes its supply chain to weather risks due to the country's limited territory. Trans-Oil is a large company by Moldovan standards as it is approximately 10x larger than its next local competitor but is a small player in the global agricultural commodity trading and processing market. Trans-Oil's scale (as measured by FY18 EBITDAR of USD61 million) is, for instance, 4.5x lower than its closest peer Ukrainian sunflower seed crusher and agricultural commodity exporter Kernel Holding S.A.'s (B+/ Stable). Also, around 90% of Trans-Oil's revenue is from trading a small selection of commodities (sunflower seeds and oil, corn and wheat).
EBITDA Growth Potential: We see potential for Trans-Oil's EBITDA to increase further by up to USD30 million over the next four years, despite the company's already high market shares. The major growth drivers will be the expansion of sunflower seed crushing capacity through the acquisition of a plant in Romania and potential development of a new organic and high-oleic seeds crushing operation in Moldova. Our rating case also assumes that the company will start internal crops production by leasing arable land and will continue expanding its partnerships with farmers.
RMI Adjustments: Fitch applied readily marketable inventory (RMI) adjustments in evaluating Trans-Oil's leverage and interest coverage ratios and liquidity position. Certain commodities traded by Trans-Oil fulfil the eligibility criteria for RMI adjustments as set out in Fitch's 'Commodity Processing and Trading Companies Ratings Navigator Companion' report dated October 2018 as 90% of the company's oilseeds and grain sales volumes on international market are made on the basis of forward contracts.
For the purpose of Fitch's RMI calculations we applied a 60% advance rate to eligible inventory to reflect basis and counterparty risks. In our calculation of leverage and interest cover metrics, we excluded debt associated with financing RMI and reclassified the related interest costs as cost of goods sold. The differential between RMI-adjusted and RMI-unadjusted funds from operations (FFO) adjusted net leverage is around 0.5x.
Moderate Leverage to Fall Further: We expect Trans-Oil's RMI-adjusted FFO adjusted net leverage to decrease to below 2.5x (FY18: 3.0x) over the next three years, building up substantial headroom under the 'B(EXP)' ratings. This is premised on EBITDA expansion and maintenance of its prudent financial policy with no dividends and M&A and limited capex at around 2% of sales despite the mentioned expansionary investments. The ratings allow for potential one-off temporary spikes in leverage due to weather risks, which are inherent in the industry and may lead to lower traded volumes.
Eurobond to Enhance Financial Flexibility: The assignment of final ratings is contingent on successful placement of the Eurobond as the expected IDRs incorporate an anticipated strengthening of the group's financial flexibility. We expect the liquidity and debt maturity profiles of Trans-Oil to improve materially after the refinancing of its short-term debt with Eurobond proceeds. The company will still need to procure trade finance facilities for each marketing season, albeit in substantially smaller amounts. We believe that refinancing risks are manageable due to Trans-Oil's record of re-establishing and increasing the limit of pre-export financing (PXF) facility since it has been obtained in July 2014.
DERIVATION SUMMARY
Trans-Oil compares well with Ukrainian sunflower seed crusher and grain trader Kernel Holding S.A. (B+/ Stable) due to similarity of operations and vertically-integrated models, which include sizeable logistics and infrastructure assets. The main difference in business models being that Kernel is already integrated into crop growing, while Trans-Oil may consider developing these operations in future. The one notch differential between the companies' ratings is explained by Kernel's greater business scale and larger sourcing market, which provides greater protection from weather risks. On the other hand, Trans-Oil's competition risks are lower than Kernel's due to the former's stronger market position and absence of competition from global commodity traders and processors in Moldova. Our leverage projections for both companies are similar.
Trans-Oil is considerably smaller in business size and has a weaker ranking on a global scale than international agricultural commodity traders and processors, such as Cargill Incorporated (A/Stable), Archer Daniels Midland Company (A/Stable) and Bunge Limited (BBB-/Stable).
No Country Ceiling, parent/subsidiary or operating environment aspects impact the ratings.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
- Crops prices normalising after an increase in FY19
- Gradual growth in crushing volumes at Floarea Soarelui following capacity expansion to 1,100-1,200 tonnes per day
- Acquisition of crushing plant in Romania, with capacity of 650 tonnes per day, for EUR10 million in FY19. No M&A over FY20-FY22
- Construction of a high-oleic and organic seeds crushing plant with capacity coming on stream in FY21
- Start of internal crops production from FY20
- Maintaining the ability to preserve profit margins in the origination and crushing segments
- EBITDA at approximately EUR90 million by FY22 in the absence of commodity market shocks
- Capex at around 2% of revenue
- Outflows under working capital driven by working capital needs of new facilities and expansion of partnerships with farmers
KEY RECOVERY RATING ASSUMPTIONS
Adequate Recovery for Secured Bondholders: The proposed senior secured Eurobond is rated in line with Trans-Oil's expected IDR of 'B(EXP)', reflecting average recovery prospects given default. The Eurobond will be secured by pledges over substantially all assets of key Moldovan entities. It will also benefit from guarantees from operating companies, which together account for no less than 85% of the group's EBITDA and assets at the issue date.
Going-Concern Scenario: Our recovery analysis assumes that Trans-Oil would be treated as a going concern in a restructuring and that the group would be reorganised rather than liquidated. We have assumed a 10% administrative claim.
The going-concern EBITDA estimate reflects Fitch's view of a sustainable, post-reorganisation EBITDA level upon which we base the valuation of the company. Trans-Oil's going-concern EBITDA is based on FY19 expected EBITDA of USD70 million, discounted by 35%. The discount reflects the company's limited diversification and the inherent volatility of agricultural commodity markets. An enterprise value (EV) multiple of 4x is used to calculate a post-reorganisation valuation. The multiple is in line with that used by Fitch for recovery analysis of Ukrainian agricultural companies, such as Kernel Holding S.A. (B+/ Stable) and MHP SE (B/ Stable).
The debt waterfall results in a 41% recovery, corresponding to Recovery Rating of 'RR4' for senior secured creditors (including the holders of Eurobond). Therefore, the planned Eurobond is rated in line with Trans-Oil's IDR of 'B(EXP)'.
RATING SENSITIVITIES
Developments That May, Individually or Collectively, Lead to Positive Rating Action
A positive rating action is currently not envisaged. Nevertheless, factors that we consider relevant for potential positive rating action include steady growth in Trans-Oil's operational scale (as measured by FFO), improvement of diversification by commodity and sourcing market, and maintaining a conservative capital structure.
Developments That May, Individually or Collectively, Lead to Negative Rating Action
- Weakening of liquidity position or risk of insufficient availability of trade finance lines to fund trading and processing operations; and
- RMI-adjusted FFO adjusted net leverage above 4.5x and RMI-adjusted FFO fixed charge cover below 2.0x (FY18: 2.6x) for more than two consecutive years.
LIQUIDITY AND DEBT STRUCTURE
Liquidity to Strengthen after Refinancing: On a pro-forma basis, following the issue of the prospective Eurobond, we expect a significant reduction in Trans-Oil's short-term debt and an improvement of the internal liquidity ratio to above 1x (0.5x at end-December 2018). Proceeds from the Eurobond are expected to be used to repay a large portion of the outstanding PXF and other bank debt."