Fitch Ratings has affirmed Kernel Holding S.A.'s Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'CC'.
The affirmation reflects our assumption that the waivers that are currently in place and maturing end-June 2023 allowing the company to delay repayment of its bank facilities, will be extended. This assumption means the company preserves its liquidity at sufficient levels to continue its operations and servicing debt without entering into default-like events. Inability to obtain lenders' consent to delay payments by 30 June 2023 would likely lead to a downgrade.
Kernel remains challenged by the difficult operating environment since Russia's invasion of Ukraine, with severe disruptions in its export activities. The company continues to operate with relatively healthy results, with Fitch-estimated EBITDA at above USD400 million in the financial year ending June 2023 (FY23) . However, there is significant uncertainty about further changes in operating conditions that may affect harvest volumes in Ukraine and access to the grain export corridor. This creates significant risks of lower profitability for FY24.
Liquidity is supported by a strong cash balance at end-March 2023, but it may deteriorate quickly if the waiver is not granted, given limited access to capital markets for Ukrainian corporates.
Key Rating Drivers
Rating Assumes Waiver Extension: Kernel signed a waiver agreement with creditors in 2022 for the postponement of bilateral loan maturities until June 2023. We understand that the group has requested and is negotiating a waiver extension on the postponement of principal repayments. Fitch assumes renewal of the waiver, given the record of ongoing support since the Russian invasion in February 2022. Kernel has been servicing interest payments and partial repayments based on the cash-sweep mechanism on the entire pool of its outstanding corporate debt so far but would like to preserve liquidity by delaying the principal repayment.
The waivers mostly relate to Kernel's senior secured bank debt, which represents 60% of its total financial obligations. The borrowings include drawings under pre-export facilities pledged against commodities as well as other bilateral secured and unsecured loans. Repayment of most of the facilities is reliant on proceeds from exports, which have been constrained.
Increasing Refinancing Risk: We view refinancing risk for Kernel's USD300 million bond maturing in October 2024 as high. Significant uncertainty and operation disruption risks related to Russia's invasion of Ukraine could result in limited access to capital markets for Kernel by the time of the bond maturity. We estimate that the company's available cash balance of USD881 million as of March 2023 (USD679 million at December 2022) and expected modest free cash flow (FCF) generation in 2023 would allow it to repay the notes. However, this would exhaust materially cash needed for working capital financing.
Moratorium on Foreign Currency 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 but it is unclear how these will be applied in practice, given disruption due to the ongoing conflict and martial law in the country. In addition, cash generated from exports and Kernel's large cash balance kept outside Ukraine (around 90% of cash as of end-2022) have to be repatriated to Ukraine within 180 days, which could constrain Kernel's ability to service its foreign-currency debt in the near term.
Deteriorated Operating Conditions: The rating reflects operational disruptions since the Russian invasion. There is high uncertainty about the extent of Russia's ultimate objectives, the length, breadth and intensity of the conflict, and its aftermath. Disruption to operations and electricity outages have been high, which have led to reduced utilisation of capacity and increased production and logistic costs. Consequently, the next grain harvest in Ukraine (FY24) is expected to be substantially reduced, which is likely to affect Kernel's crushing and trading volumes.
Uncertainty on Export Routes Availability: The Black Sea Grain initiative allows Kernel to continue exports via Black Sea ports, although this commercial route presents challenges such as bottlenecks from delayed inspections or limited quotas, resulting in lower export volumes during 9MFY23. Despite the availability of alternative options for sunflower and some grain exports, this corridor remains important for Kernel (it accounts for 87% of group's export volumes as of 1H23), as it has lower logistics costs and is vital for large-scale trading operations.
The grain deal expires in July 2023 and future allowances are unclear. Risks to Kernel's grain exports therefore remain high, while oilseed exports could see a margin reduction linked to utilisation of alternative routes.
Derivation Summary
Kernel's rating is mainly driven by the high level of credit risks related to a weak operating environment and high refinancing risks for the upcoming maturity of its USD300 million senior unsecured bond in 2024.
Key Assumptions
Revenue decline of 47% and 36% in 2023 and 2024 due to lower export volumes and assumed reduction in soft commodity prices.
EBITDA margin at 16.4% in 2023, declining to 8% in 2024
Capex of USD100 million in 2023 and USD170 million in 2024
Cash inflow of USD100 million and USD90 million in 2023 and 2024, respectively, from the sale of agricultural land
No dividends
KEY RECOVERY RATING ASSUMPTIONS
The recovery analysis assumes that Kernel would be considered a going concern in bankruptcy and that it would be reorganised rather than liquidated. We have assumed a 10% administrative claim.
Kernel's going-concern EBITDA is based on 2020 EBITDA, i.e., before the Russian invasion of Ukraine and the high point of the agricultural commodities cycle in 2021. We have discounted this by around 50% to reflect potential continued disruptions in exports and local operations resulting from Russia's invasion, vulnerability to FX risks and the volatility of grain and sunflower oil prices. The USD200 million GC EBITDA estimate reflects our view of a sustainable, post-reorganisation EBITDA level, upon which we base the valuation of Kernel.
We use an enterprise value/EBITDA multiple of 4x to calculate a post-reorganisation valuation and to reflect a mid-cycle multiple. The multiple is the same as that for MHP, a Ukrainian poultry producer.
We consider Kernel's pre-export finance (PXF) as fully drawn in our analysis as it is already at its limit. Senior unsecured Eurobonds rank after senior bank loans secured by property plant and equipment and short-term debt incurred at operating companies, i.e., mostly PXF secured by inventories.
The principal waterfall analysis generates a ranked recovery for the senior unsecured debt in the 'RR6' category, leading to a 'C' rating for the senior unsecured bonds. The waterfall analysis output percentage based on current metrics and assumptions is 0%.
RATING SENSITIVITIES
Factors That Could, Individually Or Collectively, Lead To Positive Rating Action/Upgrade
An upgrade is unlikely at this point. The resumption of export activities, an improved liquidity position and a relaxation of the restrictions on cross-border FX payments would be positive for the rating
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, entering 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
Potentially Weakening Liquidity: As of March 2023, the company had USD881 million of cash (with a large portion held offshore) on balance sheet, which the company aims to utilise for its agricultural operations. Together with pending proceeds from asset divestment of USD90 million, this is sufficient for operational needs and to face the next semi-annual coupons of USD20 million on the USD300 million 6.5% bond and USD300 million 6.75% bond in October 2023.
Lenders accommodated the request on the upcoming maturities on bilateral loans, but extension of the waiver after June 2023 will be essential to avoid liquidity tensions. We also believe that the company's access to the undrawn facilities (USD10.7 million plus USD180 million under negotiation with international financial institutions) is compromised.
Issuer Profile
Kernel is the world's largest sunflower oil producer and exporter.
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
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
KERNEL HOLDING S.A. 
