Training on banks and NBCOs, January 30–31

ACRA affirms ВВВ-(RU) to JSC Avangard-Agro, outlook Stable, and ВВВ-(RU) to bond issues

The credit rating of JSC Avangard-Agro (hereinafter, Avangard-Agro, or the Company) is based on the Company’s adequate business profile, very high profitability, medium cash flow, and medium corporate governance. However, the rating is limited by the Company’s medium size, high debt load, medium level of interest payment coverage, the limited ability to influence product prices, concentration of shareholder risks on the sole beneficial owner, close financial relationship with “AVANGARD” JSB (ACRA rating – BB+(RU), outlook Stable) (hereinafter, AVANGARD Bank), and a very high share of short-term debt (most of which to be paid within the next two years) causing liquidity risks. The Company’s revenue for 2018, which amounted to RUB 17.3 bln (up 36% from 2017 and -4% from 2016), recovered due to more favorable market conditions and improved harvest figures. Operating cash flow before net interest payments and taxes partially recovered to RUB 5.3 bln.

Avangard-Agro is an agro holding focused on cereals and technical crops in the northern and central areas of the Central Black Earth region of Russia. The Company manages approximately 450 thousand hectares of farmland; its agricultural machinery park includes up to 500 combines, 1300 tractors, and approximately 1600 vehicles. The ultimate beneficiary of the Company is K. Minovalov.

Key rating assessment factors

The limited ability to influence product prices increases the volatility of cash flows. According to 2018 data, the gross volume of Company’s crops (for main crop plants) was about 0.8% of the total Russian volume. Avangard-Agro is a competitive player in a market marked by a high level of fragmentation. In 2017, the Company's financial indicators declined due to a slump in prices for wheat, sunflower, and sugar beet on the back of overproduction of these crops in Russia. At the end of 2018, the Company's financial results partially recovered compared to 2017. Halfway through 2019, the Company was able to conclude contracts to supply a significant part of its products at prices that are 12-15% higher than in 2018.

The Company's medium business profile assessment is based on an average level of vertical integration (about 28% of revenue comes from malting barley for brewing), high level of product diversification (the share of the main product in the revenue structure does not exceed 49%), and medium share of products with high added value. The Company’s business profile is also based on high geographical diversification due to good distribution logistics and high export levels (up to 38% by the end of 2018). At the same time, ACRA notes that the Company grows its main crops in regions with moderately favorable climate conditions.

Sole ownership and high proportion of related party transactions. The rating is limited by the concentration of shareholder risks on the ultimate beneficiary, who actively participates in the Company’s strategic and operational management. ACRA notes the lack of formalization in dividend policy and regulation of risk and capital management functions at Avangard-Agro. ACRA also points out the declining share of funds borrowed from affiliates, primarily AVANGARD Bank, in the Company's debt portfolio. Funds borrowed from related parties, which amounted to 80% at the end of 2016, decreased to 47% at the beginning of 2019. Risks of related party funding are partly offset by the fact that AVANGARD Bank’s terms of lending, as they pertain to the Company, do not substantially differ from the terms applied to other counterparties.

Medium size of business with a very high level of profitability. According to ACRA’s forecast for 2018-2020, the Company’s FFO (funds from operations) before mandatory payments and taxes could reach about RUB 7 bln, while its profitability calculated as the ratio of FFO before interest and taxes to revenue will average approximately 34%.

This high profitability stems from the Company’s measures to ensure high crop yields and the high profitability of key products (malt and high-quality wheat).

High debt load and medium interest payment coverage. At the end of 2018, the Company’s debt load, i.e., the ratio of total debt to FFO before net interest, stood at 4.4x. ACRA expects this figure to decrease to approximately 3x in the forecasted period. ACRA also notes the Company’s medium level of interest payment coverage, i.e., FFO before net interest to total interest. ACRA expects this figure to stand at 4.8x for 2019-2021.

Medium cash flow. In 2018, Avangard-Agro demonstrated negative FCF profitability as the Company’s cash flow declined. However, ACRA expects that by 2020, as a result of an investment activity slowdown on the back of increasing operating cash flow, this indicator will reach 15%, returning to the level of 2015-2016. High profitability and the absence of income tax should contribute to this.

Very high short-term debt causes liquidity risks. Debt repayment should amount to around 11% (close to RUB 2.6 bln) of total debt by the end of 2019, and 37% (RUB 8.4 bln) in 2020. According to ACRA, the short-term liquidity ratio should amount to 0.85 for 2019-2021. The above risks are partly compensated by the Company’s stable relationship with its key external creditor, Sberbank (ACRA rating – AAA(RU), outlook Stable).

Key assumptions

  • Reaching revenue and operating cash flow targets for 2019-2021;
  • Stable stock of farmland (450 thousand hectares); no purchases of land in the next three years;
  • Maintaining annual capital investments at RUB 500–800 mln;
  • Maintaining profitability of FFO before interest and taxes around 40%.

Potential outlook or rating change factors

The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.

A positive rating action may be prompted by:

  • Decline in the weighted average total debt to FFO before net interest ratio below 3.5x;
  • Increase in short-term liquidity due to decrease of short-term financing and better terms of cooperation with counterparty banks.

A negative rating action may be prompted by:

  • Increase in debt load above 5х along with a decrease in net interest payment coverage below 2.5х;
  • Decline in profitability of FFO before interest payments and taxes below 15%, decrease in FFO before net interest payments and taxes below RUB 5 bln, and decrease in net cash flow profitability below 2%;
  • Significantly limited access to external sources of liquidity;
  • Decrease in the creditworthiness of AVANGARD Bank.

Rating components

Standalone creditworthiness assessment (SCA): bbb.

Adjustments: Group influence, 1 notch down from SCA.

Issue ratings

JSC Avangard-Agro, BO-001R-01 series (RU000A0ZYC31), maturity date – September 23, 2027, issue volume – RUB 3 bln – BBB-(RU).

JSC Avangard-Agro, BO-001R-02 series (RU000A0ZYH02), maturity date – November 16, 2027, issue volume – RUB 3 bln – BBB-(RU).

Credit rating rationale. The bond issues represent a senior unsecured debt of JSC Avangard-Agro. Due to the absence of either structural or contractual subordination of the bonds, ACRA ranks the bonds pari passu with other existing and future unsecured and unsubordinated debt obligations of the Company. According to ACRA’s methodology, the reimbursement rate for unsecured debt relates to category II; therefore, the bond issues are rated BBB-(RU), i.e. on par with JSC Avangard-Agro.

Regulatory disclosure

The credit ratings were assigned to JSC Avangard-Agro and bonds (RU000A0ZYC31, RU000A0ZYH02) issued by JSC Avangard-Agro under the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Non-Financial Corporations under the National Scale for the Russian Federation, Methodology for Analyzing Member Company Relationships within Corporate Groups, and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities. To assign a credit rating to the above bond issues, the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation was also applied.

The credit ratings assigned to JSC Avangard-Agro and bonds (RU000A0ZYC31, RU000A0ZYH02) issued by JSC Avangard-Agro were first published by ACRA on July 31, 2017, October 9, 2017, and November 28, 2017, respectively. The credit rating of JSC Avangard-Agro and its outlook and the credit ratings assigned to bonds (RU000A0ZYC31, RU000A0ZYH02) issued by JSC Avangard-Agro are expected to be revised within one year following the publication date of this press release.

The credit ratings were assigned based on the data provided by JSC Avangard-Agro, information from publicly available sources, as well as ACRA’s own databases. The credit ratings are solicited, and JSC Avangard-Agro participated in their assignment.

No material discrepancies between the provided data and the data officially disclosed by JSC Avangard-Agro in its financial statements have been discovered.

ACRA provided no additional services to JSC Avangard-Agro. No conflicts of interest were discovered in the course of credit rating assignment.

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