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'.

The affirmation reflects our view that the company's credit risk remains high, despite the redemption of its USD500 million bond that matured in May 2024. MHP remains challenged by severe operational disruptions from Russia's ongoing war in Ukraine (the company's main production and sourcing region) 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

High Refinancing Risk Despite Note Redemption: We view MHP's refinancing risk as high despite the recent timely redemption of its senior notes. On 10 May 2014, MHP repaid the remaining EUR211 million of its 7.75% senior notes maturing in May 2024 by using USD400 million of loan facilities provided by three international development financial institutions. These loans were deployed in late 2023 to execute two tender offers amounting to USD150.8 million and USD138 million, respectively.

The debt buyback improved MHP's liability management but the refinancing prospects remain weak and unpredictable due the company's limited access to capital markets, further aggravated by the existing cross-border payment moratorium imposed by the National Bank of Ukraine in 2023, and the next significant maturity of USD550 million due in April 2026.

Short-Term Financing Availability Key: MHP's operations remain highly reliant on the 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 early 2026.

Liquidity is also supported by a strong cash balance of USD411 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 the companies' ability to service its 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 of grains and vegetable oils 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: MHP's EBITDA declined to USD495 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 16.1% in 2024 with limited profit recovery to 2027.

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 MHP, MHP's 95.4%- 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 PJSC MHP'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 MHP'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 securing ongoing financing of operational needs and timely refinancing of public debt instruments amid limited access to capital markets, constrained cross-border payment mechanisms and a highly challenging operating environment with Ukraine being under martial law.

Key Assumptions

Revenue down 2.8% in 2024 on a normalisation in prices followed by a single low single digit revenue growth from 2025 to 2027

EBITDA margin of around 16% in 2024 to gradually increase towards 17% over the rating horizon

Capex of USD300 million in 2024 to reduce to USD200million in 2025 and USD160 million per year over the rating horizon

Working capital outflow around USD50 million in 2024 followed by reversal in the low teens in 2025

No dividends and M&A to 2027

Recovery Analysis

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

We have assumed a 10% administrative claim. MHP's USD175 million GC EBITDA reflecting the potential disruptions to exports and local operations resulting from Russia's invasion, as well as vulnerability to FX risks and to the volatility of poultry, grain, sunflower seeds prices, and some raw-material costs as well as complexity for senior noteholders to access cash proceeds amid high transfer and convertibility risks. The GC EBITDA estimate reflects our view of the strategic importance of MHP to provide food to the Ukrainian population and its ability to continue to operate rather than the sustainability of the capital structure.

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 indicates a recovery rate of 22%, a modest decline from the 28% recovery rate previously. In the debt hierarchy we have considered bilateral financing of USD190 million as senior secured, which ranks ahead of MHP's senior unsecured notes, and pari-passu with PXF facilities. The outstanding unsecured debt includes the benefits of the May 2024 bond redemption.

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 USD411 million of cash, including a restricted USD25million 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 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 with 2023 revenue of USD3 billion and EBITDA margins of around 16.4%.

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.

(C) 2024 Electronic News Publishing, source ENP Newswire