Fitch affirms KazExportAstyk at ‘B’; outlook stable
Oct 22. Reuters
Fitch Ratings has affirmed Kazakhstan-based JSC Holding KazExportAstyk’s (KEA) Long-term foreign and local currency Issuer Default Ratings (IDRs) at ‘B’ and its National Long-term rating at ‘BB(kaz)’ with a Stable Outlook. Fitch has also upgraded its senior unsecured rating to ‘B’ from ‘B-‘ and National senior unsecured rating to ‘BB(kaz)’ from ‘B+(kaz)’. The IDRs and Stable Outlook reflect our expectation of sustained cash flows and financial performance based on moderately increasing crop yields, despite weaker selling prices. The ratings also reflect high inherent business risks.
Financial flexibility has improved on the back of the equity injection made by EBRD (AAA/Stable), as a new investor owning 13% of KEA’s share capital, a diminished exposure to the leasing business and positive free cash flows (FCF) supported by recent debt refinancings. The change in debt composition towards unsecured borrowings underpins the upgrade of the senior unsecured rating to ‘B’.
KEY RATING DRIVERS
High Business Risks
The IDRs continue to reflect the group’s moderate to high business risks due to the cyclicality and seasonality of the agricultural commodities sector, its reliance on one geographical area and lack of any large scale vertical integration or diversification beyond ancillary agricultural services. This is mitigated by its long-term partnership agreements with 20 partner agro-firms and, more recently, by increasing diversification to include own farming and by crop production to optimise use of land along with rising exports.
Strong Market Position
KEA is the third-largest grain producer in Kazakhstan and a leading producer of oilseeds. Together with its partner agro-firms, KEA operates a land bank of over 1,054 thousands hectares, with sufficient storage (1.5 million tonnes) for active trading. While it has strong bargaining power with local grain suppliers, all traders including KEA remain dependent on the intervention of state-owned Food Contract Corporation (FCC) to support domestic prices, particularly in years of bumper harvest.
Resilient Financial Performance
Despite a severe drought in Kazakhstan in 2012 causing gross harvest at KEA and its partner agro-firms to fall by 44% yoy, KEA showed a 33% growth in revenues to KZT70.6bn, driven by larger grain trading volumes and higher grain prices. Although the lower-margin trading operations put pressure on KEA’s EBITDA margin (27% in 2012 vs. 32% in 2011), KEA ended 2012 with positive FCF. This was due to better working capital management and low capex. We expect positive FCF in 2013 on expected higher operating profitability due to less trading activity. However, future FCF may be constrained by dividend payouts, which we assume will be moderate, and subject to KEA’s operating performance.
Difficult Operating Environment
Kazakhstan has unpredictable climate conditions, leading to low and unreliable crop yields that are only partly mitigated by higher quality wheat, government support and a favourable global outlook for grain demand. In addition, low production costs are offset by higher distribution costs of exports to trading hubs (Baltic and Black Sea terminals). Although KEA maintains well invested infrastructure, we believe that further investments or partnerships will be required to ensure continuing access to export markets.
Improved Debt Profile
KEA has shown continued reduction of secured debt, amounting to just 7% of its debt portfolio as of June 2013 vs. 24% in 2012. Most of the debt is long-term with 66% of total debt to be repaid in 2016. Moreover, Fitch expects total debt to stay stable over 2013-2016. Total adjusted debt to operating EBITDAR improved to 3.6x in FY12 from 4.5x in FY11 and is likely to increase towards 4x in 2013 before slightly declining thereafter. Funds from operations (FFO) fixed charge coverage exceeded 2x in 2012 and we expect it to further improve in 2013-14 on the back of expected stronger FFO.
Diminished Subordination for Unsecured Creditors
Recent progress towards refinancing secured debt with unsecured borrowings, as well as general de-leveraging, have caused us to improve our recovery expectations for unsecured bondholders to average recovery prospects (or Recovery Rating RR4) from below-average (RR5) previously. This is, however, soft-capped at the IDR level for Kazakhstan issuers due to country-specific treatment of RR by Fitch. In the event of default we believe liquidation would yield greater recoveries than a going concern sale/restructuring due to KEA’s high working capital-related assets. Our view on expected recoveries is, however, tempered by the weak terms of the unsecured bond, such as the lack of robust covenants and restrictions to incur additional debt.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
-Inability to maintain cash on balance sheet plus inventories and available undrawn committed facilities (as a percentage of short-term debt maturities) above 80% (in excess of 250% as of FYE12; 100% as of FYE11)
-Total lease-adjusted debt/EBITDAR above 4x, equivalent to FFO adjusted leverage above 5x, together with negative FCF over a two-year period
Positive: Although Fitch considers further positive ratings momentum to be limited due to its modest scale and material exposure to cash flow volatility, any future developments that may, individually or collectively, lead to a positive rating action include
-Greater diversification through vertical integration, crop plantings and increased exports as a percentage of sales
-Total lease-adjusted debt/EBITDAR under 2x, equivalent to FFO adjusted leverage under 3x
-FFO fixed charge cover above 3x
-Positive free cash flow after acquisition or dividends for at least two consecutive years
-Full coverage of short-term debt commitments with available liquidity.