Crop Producer Ukrainian Agrarian Investments Assigned 'B' Long-Term Corporate Credit Rating; Outlook Stable
August 1, 2012 Standard & Poor's
• We assess the business risk profile of Ukraine-based crop producer Ukrainian Agrarian Investments S.A. (UAI) as "weak" due to the inherently volatile nature of the agricultural industry and a history of Ukrainian government intervention in UAI's markets.
• We assess UAI's financial risk profile as "highly leveraged" due to potential cash flow volatility and the company's high level of short-term debt. In addition, the company intends to finance its significant capital expenditure program partially with medium-term debt.
• We are assigning our 'B' long-term corporate credit rating to UAI.
• The stable outlook reflects our forecast for meaningful profit growth in 2012, in part reflecting the currently favorable trading environment for UAI's corn crops. The outlook incorporates our assumption that the company will extend its short-term debt in the first half of 2013.
PARIS (Standard & Poor's) July 31, 2012--Standard & Poor's Ratings Services said today that it assigned its 'B' long-term corporate credit rating to Ukraine-based crop producer and trader Ukrainian Agrarian Investments S.A. (UAI). The outlook is stable.
The rating on UAI reflects our assessment that the company's business risk profile is "weak." Our assessment primarily reflects UAI's participation in the volatile agriculture industry and the high risk of doing business in Ukraine. Moreover, there is a history of intervention by the government of the Ukraine (B+/Negative/B) in UAI's markets. It is our view that if the Ukrainian government were to interfere in agricultural markets in the future--including the imposition of new restrictions on export sales--UAI's sales, profitability, and cash flow could weaken. In addition, the highly seasonal nature of UAI's business (entailing fluctuations in working capital) and the unpredictability of weather patterns are key risk factors for the company and the rating. Many of these risks are largely out of the company's control.
Nevertheless, we believe that UAI benefits from its lease rights to high-quality farmland, low production costs, and the currently favorable trading environment (in terms of pricing and demand) for its crops.
We assess UAI's financial risk profile as "highly leveraged," primarily due to the volatility in profit and cash flow that is inherent to the agricultural industry; UAI's reliance on short-term, high-interest rate debt; and its expansion program, which will likely consume most of its free cash flow. We currently assume that the favorable trading environment will continue and that the meaningful profit growth we forecast in 2012 should allow UAI to extend its short-term debt next year.
Although much of UAI's corn crop has yet to be sold, we forecast solid growth in revenues, profit, and cash due to a high level of corn production and pricing. We believe that this growth will more than offset potentially lower harvests for certain other crops that poor weather conditions may have damaged last winter; an estimated $8 million increase in land lease costs; and a modest reduction in VAT retention.
We could lower the rating if we forecast deterioration in profitability and credit measures, including leverage of more than 4x. This could result from potential actions by the Ukrainian government, including but not limited to the potential imposition of restrictions on the sale of certain of the company's crops; a potential poor future harvest due to extreme weather conditions; or from a significant drop in pricing, especially for corn. We estimate that leverage would exceed 4x if EBITDA fell by 40%. We could also lower the rating if we forecasted a reduction in liquidity, which could occur if UAI were unable to renew its short term credit lines, or if we lowered the ratings on Ukraine.
We would consider raising the rating if UAI is able to execute its expansion plan while maintaining credit measures near current levels; if the company's liquidity improves, including through a reduction of its reliance on short-term debt; and if our view on the risks of operating in Ukraine improves. However, we consider this unlikely over the near term, primarily due to Ukrainian country risk.
Company — Ukrainian Agrarian Investments
Full nameUkrainian Agrarian Investments S.A.