Fitch Ratings has upgraded MHP SE's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) to 'CC' from 'C' following repayment of all the missed coupons in March-May 2022 ahead of the expiration of the 270-day standstill period. The senior unsecured rating has been affirmed to 'C' with a Recovery Rating of 'RR5'. A full list of rating actions is detailed below.
MHP's ratings continue to reflect severe operational disruptions from the ongoing Russian invasion in Ukraine - the main production and sourcing region for the company - as well as heightened refinancing and liquidity risks, which together lead to a high probability of default.
The ratings assume MHP will continue to be able to refinance existing short-term credit facilities needed for its operating needs, while access to new funding is likely to remain limited in near term.
Key Rating Drivers
Deferred Coupons Paid, Standstill Ends: In 2022 MHP signed a standstill agreement with Eurobonds creditors for the non-payment of USD49 million interest payments on three note issues that were due in March, April and May 2022. Fitch has received confirmation that these coupons were repaid by 14 and 29 December 2022 and 4 February 2023, before the extended grace period expiry. Together with continued service of all its debt liabilities, and our assumptions of no further standstill to be entered in relation to its bank debt facilities in near term, this justifies the IDR upgrade to 'CC'.
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 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, ensuring operational continuity over the rating horizon to 2025.
Heightened Refinancing Risk: We see high refinancing risk for MHP's USD500 million bond maturing in May 2024. Significant uncertainty and operation disruption risks related to Russia's invasion in Ukraine could result in limited access to capital markets for MHP by the time of the bond maturity. We estimate that the company's available cash balance of USD300 million as of end-2022 and expected modest free cash flow (FCF) generation in 2023 will not allow MHP to repay the notes. We therefore believe some refinancing will be discussed with its creditors.
Moratorium on Debt Service Unclear: The National Bank of Ukraine has introduced a moratorium on cross-border foreign-currency payments, potentially limiting 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 has to be repatriated to Ukraine within 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 85% of cash as of end-2022).
Disrupted Exports Hit Profitability: We estimate MHP's EBITDA reduction to USD346 million in 2022 from USD435 million of 2021 as higher selling prices only partly offset reduced sales volume, cost inflation, higher logistic costs and the devaluation impact of local currency. We assume a moderate reduction in poultry prices in international markets in 2023, which together with our cautious estimates for sales volumes, suggest limited profit recovery in 2023. As a result, we forecast EBITDA margin to remain at historically low levels of around 13% in 2023-2025 (2021: 18.3%).
Uncertainty on Export Routes Availability: Since the Russian invasion MHP's exports of grain have been severely disrupted as Ukrainian ports in the Black Sea were blocked. Given the Grain Deal for the safe maritime corridor in the Black Sea will expire in March 2023 and continued uncertainty over its renewal, risks to MHP's exports remain high. This is only partly offset by alternative export routes via EU borders and the River Danube, as logistical bottlenecks will significantly undermine MHP's export capacity. Any additional disruption to export may result in further profit declines for the company.
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. The company is also providing a portion of produce free of charge, which could affect profitability in the near term.
Strong Parent-Subsidiary Links: The Long-Term IDRs of PJSC Myronivsky Hliboproduct, MHP SE's 99.9%- owned subsidiary, are equalised with those of MHP, due to strong strategic and legal ties between the two companies. Myronivsky Hliboproduct is a marketing and sales company for goods produced by MHP in Ukraine. The strong legal links with the rest of the company are underlined by 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
MHP rating is mainly driven by high level of credit risks related to a weak operating environment and high refinancing risks for the upcoming maturity of its senior unsecured notes in 2024.
Key Assumptions
Revenue broadly flat in 2023-2025 after a 7% increase in 2022
EBITDA margin of at 12.6%-12.8% in 2023-2024, down from 13.6% in 2022
Capex of USD140 million p.a. over the next four years
No dividends and M&A
KEY RECOVERY RATING ASSUMPTIONS
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 is based on 2021 EBITDA discounted by 60% to reflect disruptions to exports and local operations resulting from Russia's invasion, as well as vulnerability to foreign-exchange (FX) risks and to the volatility of poultry, grain, sunflower seeds prices, and some raw-material costs. 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 as fully drawn in our analysis. Unlike a revolving credit facility (RCF), a PXF facility has several drawdown restrictions and the availability window is limited to only part of the year. Operating company bank debt and 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 20%.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade is unlikely at present unless MHP resumes export activities, improves its liquidity position and sees a 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
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Limited Liquidity: As of end-2022, Fitch assumes MHP had about USD300 million of cash, of which USD255 million 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 the USD49 million coupon payment on senior unsecured bonds due in spring 2023. However, we see high refinancing risks for the bank financing as well as potential disruptions to export flows, which is captured by the IDR.
Issuer Profile
MHP is the largest poultry producer and exporter in Ukraine (2021 revenue of USD2.3billion). Vertical integration into crop growing allows the company to generate high EBITDA margins and enhances its competitiveness in export markets.
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.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
MHP SE 
