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Fitch Ratings has affirmed Russia-based Agribusiness Holding Miratorg LLC's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'B'. The Outlook is Stable. Fitch has simultaneously withdrawn all ratings for commercial reasons.

The ratings reflect Miratorg's currently heightened leverage levels due to ongoing, largely debt-funded, capex expansion projects and high amount of guarantees provided for related parties' liabilities. This is balanced by the group's large scale, its strong market positions in Russia and a high degree of vertical integration across the value chain, which results in strong EBITDA margins.

The Stable Outlook reflects Fitch's expectation that following high leverage in 2019-2021, the company should gradually deleverage from 2022 as new production facilities will come on stream, as well as our assumption that Miratorg will be able to maintain ready access to bank financing and obtain funding for new investments on a timely basis.

The ratings were withdrawn with the following reason: for commercial purposes

KEY RATING DRIVERS

Vertically Integrated Business Model: Miratorg's ratings are supported by the group's robust business model. Miratorg is the largest pork producer and ranks among the top 10 chicken producers in Russia. It benefits from vertical integration across the value chain, from crop growing and fodder production to livestock and poultry breeding, slaughtering and product delivery. High vertical integration enables the group to maintain EBITDA margins higher than its peers and to smooth out the business's inherent volatility.

Expansion in Progress: Miratorg is in the middle of its massive project to double pork production by 2024 toward 1 million tonnes (2019: 428,000 tonnes) driving industry consolidation trends, increasing its market share at the expense of small players and household producers, while participating in growing export opportunities. In 2018-19, Miratorg invested RUB44 billion out of a total project cost of RUB156 billion. However peak investments are planned for 2020-2021 at around RUB112 billion. Miratorg is also investing RUB5 billion in growing its poultry capacities by nearly 32% or 35,000 tonnes, which should become operational in 2021.

We estimate execution risks related to the projects are limited, based on Miratorg's strong track record in green field farms and processing capacities launches over the last decade. We expect that once completed, Miratorg's credit profile will benefit from the group's greater scale, strengthened market positions and economies of scale.

Leverage at Peak: As a result of large investments anticipated in 2020-21, we expect Miratorg's funds from operations (FFO) gross leverage to be high at 7.5x in 2020 (2019: 7.0x), more in line with a lower rating, before gradually declining toward 5.0x in 2022 once capacity starts to ramp up and capex normalises. Current high leverage levels continue to pressure Miratorg's credit profile. The projected deleveraging pace would also be subject to Miratorg's other expansion plans, as well as the extent of support provided to related-party projects where we have less visibility.

Support to Related-Party Project: In 2019 Miratorg provided RUB10 billion in loans to related parties, mainly the beef business developed by its shareholders. In addition, Miratorg supports it via working capital, increasing receivables from related parties by RUB3.7 billion and buying rights for their receivables from third parties of RUB2.4 billion in 2019. We conservatively factor in cash support from Miratorg through related-party loans of around RUB5 billion per year over 2020-2023 and assume higher working capital investments, capturing the possibility of further support to related parties.

At end-2019 Miratorg also guaranteed RUB41.0 billion (2018: RUB41.6 billion) working capital loans of its beef business but reduced this to RUB25.4 billion by June 2020. We treat these guarantees as off-balance sheet debt and add the amount to Miratorg's own debt obligations, which is expected to contribute 0.8x to FFO gross leverage in 2020.

Profitability of Pork Under Pressure: We expect EBITDA margin in the core pork segment (2019: 58% of group EBITDA) to remain pressured at around 37% vs. an average 46% in 2016-18 (based on gross revenue) due to further, albeit slower, decline in pork prices in the country, stemming from growing meat supply from both local producers and importers.

Together with subdued consumer sentiment in Russia, we do not expect a fast recovery in pork prices in the near term. Profitability of the pork segment will be dragged down by the lower margins of the new production facilities until they reach planned capacity post-2023. While below historical averages, the projected EBITDA margin will remain at very strong levels compared with international peers.

Accelerated Exports: In 1H20 Miratorg doubled its export sales volumes, mainly driven by the opening of the Chinese market for poultry in 2019 and pork in 2020. Increased export sales allowed the group to fully offset reduced demand from the hotel and restaurant sales channel (nearly 18% of revenue in 2019), which domestically resulted from COVID-19-related social distancing measures. We also anticipate that increasing exports by Russian pork and poultry producers to China and Middle East should help support internal meat prices, absorbing part of growing domestic supply.

Other Segments Support Profit: We estimate lower profitability in the pork segment in 2020 will be partly offset by continued growth in other profitable segments. The poultry and crop farming divisions, which have EBITDA margins of 30% or above, continue to demonstrate revenue growth on the back of further output increase and a more favourable price environment. However, as new pork facilities will ramp up, the share of other segments in EBITDA is likely to return to below 30% (2019: 42%).

Weak Governance Drags on Credit Profile: In Fitch's view, Miratorg's corporate governance is not in line with international standard practices due to key man risk from its two shareholders, related-party transactions, guarantees provided outside the group perimeter and a complex group structure. Miratorg's audited consolidated accounts include entities that it controls the operations of but does not own. Weak governance practices continue to have a moderate negative impact on the group's credit profile.

State Support for the Sector: As an agricultural producer, Miratorg enjoys a favourable tax regime and subsidised interest rates. This helps its cash flow generation, leading to improved financial flexibility. As food self-sufficiency remains one of key objectives of the Russian government, we expect state support to agricultural producers to be maintained over the next four years. Our rating case assumes this level of state support is maintained but also recognises that the company's increasingly strong scale benefits and market position would enable it to successfully cope with a less favourable environment.

DERIVATION SUMMARY

Miratorg has a smaller business size and weaker ranking on a global scale than industry leaders Tyson Foods Inc. (BBB/Negative), Smithfields Foods Inc. (BBB/Stable) and BRF S.A. (BB/Stable). Furthermore, Miratorg's projected leverage is substantially higher than peers and the group's rating also incorporates weak corporate governance practices.

Miratorg has a similar vertically integrated business model and comparable size with the largest Ukrainian poultry producer and exporter MHP SE (B+/Stable), whose rating is also pressured by Ukraine's operating environment. Compared with MHP, Miratorg has higher Fitch-projected leverage and weaker corporate governance, which result in a rating difference.