Fitch Ratings has affirmed MHP SE's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'CC'. Its senior unsecured rating has been affirmed at 'C' with a Recovery Rating of 'RR5'.

MHP's ratings affirmation reflect our view that, even after the partial buyback of its maturing 2024 bond, its credit risk remains high. MHP remains challenged by severe operational disruptions from the ongoing Russian invasion in Ukraine - the main production and sourcing region for the company - as well as high refinancing and liquidity risks, which together lead to a high probability of default.

The ratings assume MHP will continue to be able to refinance its existing short-term credit facilities for its operating needs, while access to new funding is likely to remain limited in the near term.

Key Rating Drivers

Tender Offer Eases Refinancing Risk: MHP - between September 2023 and January 2024 - partially redeemed USD289 million of its USD500 million 7.75% senior notes maturing in May 2024 through a new USD400 million facility provided by three international and developments financial institutions. Fitch does not treat it as a distressed debt exchange despite the terms being below par as the exchange was conducted with voluntary participation of investors with no evidence of coercion.

The buyback has improved MHP's liability management, easing refinancing requirements but refinancing risk remains high. We estimate that its available cash balance of USD400 million as of end-2023 and expected modest free cash flow (FCF) generation in 2024 will allow MHP to repay the remaining outstanding USD211 million notes.

Short-Term Financing Availability Key: MHP's operations remain highly reliant on continued availability of working-capital facilities to fund sowing campaigns, and to ensure operational continuity and the ability to export. In light of the latest continued support MHP has received from banks and with most of its credit facilities having been refinanced, we assume the company will maintain access to these facilities to ensure operational continuity to 2026. Liquidity is also supported by a strong cash balance of EUR400 million at end-2023, but it may deteriorate quickly given limited access to capital markets for Ukrainian corporates.

Moratorium on Debt Service Unclear: The National Bank of Ukraine's moratorium on cross-border foreign-currency payments potentially limits companies' ability to service their foreign-currency obligations. Exceptions can be made to this moratorium but it is unclear how these will be applied in practice, given disruption caused by the ongoing conflict and martial law in the country. Also, cash generated from exports must be repatriated to Ukraine within 90 days (tightened from 180 days), which could constrain MHP's ability to service its foreign-currency debt in the near term. These risks are partly offset by MHP's large cash balance kept outside Ukraine (around 80% of cash as of end-2023) and only 50% of its export revenues being subject to the regulation.

Disrupted Operations Hit Profitability: We estimate MHP's EBITDA to have declined to USD517 million in 2023 from USD544 million in 2022 as its price mix only partly offset reduced sales volume, higher logistic, utilities and personnel costs, and the devaluation impact of the local currency. We assume a moderate reduction in commodities prices in international markets in 2024, which together with our cautious estimates for sales volumes, leads to a reduction in EBITDA margin to 16.7% in 2024 with limited profit recovery to 2026.

Uncertainty on Export Routes Availability: Since the Russian invasion commercial routes of agricultural products have been severely disrupted as Ukrainian ports in the Black Sea were blocked and strikes at the borders have increased. Despite the availability of alternative options MHP's exports remain highly reliant on the temporary humanitarian Black Sea corridor. Any further operational escalation around MHP logistic environment may lead to additional logistic and transportation costs using alternative delivery routes.

Ukrainian Food Security in Focus: MHP's main priority is to provide food for people in Ukraine. MHP historically supplied around half of all chicken produced commercially for Ukraine. Due to the disruptions, many other poultry producers have ceased operations as they were in locations closer to the war zone. MHP's poultry production is currently operating at close to full capacity.

Strong Parent-Subsidiary Links: The Long-Term IDRs of PJSC Myronivsky Hliboproduct, MHP's 99.9%- owned subsidiary, are equalised with those of MHP reflecting our assessment of MHP's 'Medium' operational and 'High' strategic incentives for supporting the subsidiary. This is based on both companies operating with common management and Myronivsky Hliboproduct's strategic importance for the marketing and sales of goods produced by MHP in Ukraine.

We assess legal incentives as 'High' due the presence of cross-default/cross-acceleration provisions in Myronivsky Hliboproduct's major loan agreements and suretyships from operating companies generating a substantial portion of MHP's EBITDA.

Derivation Summary

We have performed a peer comparison to assess MHP versus their peers. However, we acknowledge that MHP's rating is driven by its high credit risks related to the repayment of its upcoming senior unsecured note maturity amid limited access to capital markets and a weak operating environment.

Key Assumptions

Revenue down 2.8% in 2024 on a normalisation in prices, from a 13% growth in 2023

EBITDA margin of around 17% for 2024 to 2026, from an estimated 17.3% in 2023 weighed down by higher logistic and personnel costs

Capex of USD160 million a year for 2024 to2026 from an estimated USD180 million in 2023

No dividends and M&A to 2026

Recovery Analysis

The recovery analysis assumes that MHP would be a going concern (GC) in bankruptcy and that it would be reorganised rather than liquidated; however, this assumption may be revisited depending on how the conflict evolves.

We have assumed a 10% administrative claim. We estimate MHP's GC EBITDA at USD175 million, reflecting disruptions to exports and local operations resulting from Russia's invasion, vulnerability to foreign-exchange (FX) risks and to the volatility of poultry, grain, sunflower seeds prices, as well as complexity for senior noteholders to access cash proceeds amid high transfer and convertibility risks.

We use an enterprise value (EV)/EBITDA multiple of 3.5x to calculate a post-reorganisation valuation and to reflect the heightened operating risks in the region and a mid-cycle multiple. We do not assume MHP's pre-export financing (PXF) facility is fully drawn in our analysis. Unlike a revolving credit facility, a PXF facility has several drawdown restrictions and the availability window is limited to part of the year. PXF facilities are treated as prior-ranking debt in our waterfall analysis. The principal waterfall analysis generates a ranked recovery for the senior unsecured debt in the 'RR5' category, leading to a 'C' rating for senior unsecured bonds. The waterfall analysis output percentage based on current metrics and assumptions is 28%. This is slightly above the previously estimated 20% and reflects the partial senior notes repurchase.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:

An upgrade is unlikely at present unless MHP sees improved access to external financing and reduced operating risks along with relaxation of the restrictions on cross-border FX payments

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:

Evidence of a default or default-like event including entering into a grace period, a temporary waiver or standstill following non-payment of a financial obligation, announcement of a distressed debt exchange or uncured payment default would be rating-negative

Liquidity and Debt Structure

Limited Liquidity: As of end-2023, MHP had about USD400 million of cash, including a restricted USD25 million for trade working-capital. Around 80% of its cash was in hard currency, of which 85% was held outside of Ukraine, which the company can utilise for its agricultural operations and to service its debt. We believe MHP has sufficient liquidity to cover operating needs and coupon payment on senior unsecured bonds in 2024.

MHP has been granted a facility up to USD480 million by three development financial institutions to repay 80% its 2024 Eurobond along with its own cash. To take advantage of prevailing low interest rates MHP announced two tender offers in September and December 2023 with a repurchase price above the market price, following which it was able to redeem around USD289 million. This leaves the remaining outstanding face value of USD211 million to be paid at maturity in May 2024. We expect liquidity will tighten after the bond redemption but to remain sufficient for its operational needs.

Nevertheless, we continue to assess refinancing risks as high given MHP's weak access to external financing, which is captured by the IDR.

Issuer Profile

MHP is the largest poultry producer and exporter in Ukraine (2022 revenues USD2.6 billion, EBITDA margins around 21%).

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

MHP has an ESG Relevance Score of '4' for group structure, reflecting related-party loans. This has a negative impact on its credit profile and is relevant to the rating in conjunction with other factors.

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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