July 27 (SeeNews) - Standard & Poor's has said it affirmed its 'B+' long-term issuer credit rating to Serbia-based agribusiness group AEC Agrinvestment Ltd. (Agri Europe), with a stable outlook.
S&P assigned on January 29 a 'BB-' preliminary issuer credit rating on Agri Europe, but decided to downgrade it, as the company's profitability and free cash flow generation for the next 12-18 months will be significantly weaker than previously expected, the rating agency said in a statement on Thursday.
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"We now anticipate persistently low market prices for sugar in Europe during 2018 and 2019. This will have a significant effect on the profitability of Agri Europe's sugar production, which contributed about 60% of EBITDA in 2016," S&P said.
S&P also said in the statement:
Sugar prices in Europe are expected to remain weak, chiefly because of a continued oversupply of sugar in Europe and low global market prices. Despite a competitive operating cost structure and a dominant position in Serbia, with established storage and distribution in the southern Central and Eastern Europe (CEE) region, the low market prices, combined with inherently high operating leverage, are likely to weaken the profitability of the sugar activities.
Overall, we expect Agri Europe's lower earnings, volatile working capital swings, and planned capex, could present downside risks to our free cash flow projections and credit metrics for the next 12-18 months. Under our base case, we currently project free cash flows of about EUR30 million in 2018 and S&P Global Ratings-adjusted debt to EBITDA of about 4.5x-5.0x.
Our rating analysis incorporates Agri Europe's smaller scale of operations and, to a lesser extent, a lower product diversity than we previously assumed in January 2018.
Management decided not to proceed with the issuance of long-term senior notes at present. Therefore, we view the debt structure and debt maturity profile as less favourable. Agri Europe will remain reliant on bank lines to fund its business needs and will continue to bear significant debt maturities in the next 12 months. We understand the company is expecting most of these credit lines to be renewed and rolled over. We also note it has a diverse pool of lenders and the ability to secure long-term credit lines.
Agri Europe is an agribusiness group that is part of a wider diversified group that operates in banking (AIK Banka in Serbia) and owns a small portfolio of hotels in the region. We rate the company based on our assessment of the credit quality of its agribusiness activities, as well as the activities of the wider group, including banking and hotels.
The stable outlook reflects Agri Europe's dominant position in its domestic market, the large share of export sales in euros, and the competitiveness of its manufacturing and distribution facilities. That said, the very low level of sugar prices in Europe is likely to persist in 2018 and 2019 and we expect this to constrain free cash flow generation.
At the current rating level, we anticipate that Agri Europe will maintain our adjusted debt-to-EBITDA ratio of around 4.5x and positive free cash flow in the next 12 months.
We could lower the rating if we see a sharper-than-expected drop in profitability over the next 12 months, especially if it affects sugar production, coupled with an inability to manage the volatile working capital swings.
We could also lower the rating if we consider that the credit quality of the banking operations has materially deteriorated. We would take a negative rating action if we saw S&P Global Ratings-adjusted debt to EBITDA at or above 5.0x for the next 12 months and free cash flow generation being neutral or negative.
We could raise the rating if we saw a strong and sustained rebound in earnings over the next 12 months, especially if it came from sugar production. Assuming good control on capex and working capital swings, we would then see likely stronger free cash flow generation than in our base case and a sharper reduction in leverage in 2018.
Longer term, we would view it as positive if Agri Europe were to expand the scale of operations in the CEE region, with a focus on exports, as well as widening its product diversity to include a larger share of value agricultural products such as meat processing or food and beverages. We could also raise the rating if we considered that the credit quality of the banking operations had materially improved.
An upgrade would depend on S&P Global Ratings-adjusted debt to EBITDA decreasing to below 4.0x on a sustained basis, combined with stronger free cash flow generation than in our current base-case projections."