OREANDA-NEWS. Fitch Ratings has affirmed Sodrugestvo Group S. A.'s Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'B-'. The Outlook is Stable. At the same time, Fitch has withdrawn Sodrugestvo's ratings because the ratings have been taken private. Accordingly, Fitch will no longer provide public ratings or analytical coverage for Sodrugestvo. A full list of rating actions can be found at the end of this release.

The ratings reflect Fitch's expectations that Sodrugestvo's raw materials and inventories (RMI)-adjusted funds from operations (FFO) adjusted gross leverage will remain high, despite a projected decrease to around 6.0x-6.5x in FY16-FY18 (fiscal year ending June 30) from its peak levels of 7x-8x in FY14-FY15. The ratings also factor in Sodrugestvo's weak liquidity and increased refinancing risks, particularly in conjunction with enlarged RMI-adjusted short-term debt and substantial amortisation payments under long-term loans in FY17. However, we expect that Sodrugestvo will retain access to bank financing due to its scale and sustainable business model, which is reflected in the Stable Outlook

.

KEY RATING DRIVERS

Weak Liquidity, Refinancing Risks: As an agricultural commodity processor and trader, Sodrugestvo maintains high short-term debt connected with crop procurement and the crushing cycle. However, at FYE16 short-term maturities of USD724m also included amortisation payments on long-term debt of around USD135m, which the company needs to refinance given its limited FCF generation ability. Over the past two years the company has been refinancing maturing tranches of its term loans by drawing on its revolving credit facilities.

In our view, this policy is exposing the company to heightened liquidity and refinancing risks and also reduces potential government interest-rate subsidies as they are received primarily on term loans.

Stabilisation in Crushing Margins: Based on unaudited financials, Sodrugestvo's Fitch-calculated EBITDA (excluding government interest rates subsidies that Fitch reclassifies as part of FFO) for 9MFY16 grew to USD135m (9MFY15: USD94m) reflecting some stabilisation in soybean crushing margins. On this basis, we estimate Sodrugestvo's EBITDA to have increased to around USD140m in FY16 (FY15: USD102m). As we assume weak soft commodity prices and no further efficiency improvements in its operations over the medium term, we project EBITDA will remain around this level unless the company extends its crushing capacity.

Excessive Leverage: Fitch estimates Sodrugetsvo's RMI - and FFO-adjusted leverage decreased to 6.0x-6.5x in FY16 (FY15: 7.3x) in line with our previous projections. However, in contrast to our expectations, deleveraging was achieved due to growth in EBITDA rather than debt reduction. Debt was around USD100m higher year-on-year at FYE16, primarily as a result of slowdown in inventory turnover.

Despite some upward revision in our EBITDA forecasts, we maintain our view that there is limited scope for further deleveraging over the medium term and that Sodrugestvo's leverage will probably remain at levels not commensurate with the 'B' category rating. Our forecasts assume weak operating cash flows, constrained by high interest payments and redeployed to fund expansion projects in FY17-FY19, rather than allocated to repaying debt. We have also scaled back our assumption for the company's government interest-rate subsidies to around USD20m from USD25m-USD30m per year following a reduction in term loans. In isolation, a full cancellation of subsidies, if not offset by a similar increase in EBITDA, could lead to an increase in RMI-and FFO-adjusted leverage by up to 2.0x.

Our leverage calculations exclude a shareholder loan from debt (FY15: USD86.3m). However, any material prepayments under this loan, breaching its status of perpetual equity, would lead to reclassification of the remaining portion of the loan to debt and increase leverage by around 0.7x.

Aggressive Financial Policy: Our through-the-cycle view reflects an aggressive financial policy whereby, should profits increase, or if there were new equity injections (as happened with Mitsui), management would most likely reinvest such spare cash flows into additional capex/acquisition projects, carrying various execution risks, instead of permanently reducing debt.

Sustainable Business Model: Sodrugestvo's asset-heavy business model with vertical integration in soybean origination, storage, processing and product delivery enables the company to maintain its position as the largest soybean crusher and rapeseed oil exporter in Russia. Its acquisition of a 60% stake in a river port terminal in Paraguay in 2015 enhanced the company's ability to procure soybeans from the region. Sodrugestvo's scale, market position and asset ownership are among the major supportive factors of a 'B-' rating.

Moreover, we note the government support to the food producing sector in Russia, given the food import ban in place and other measures as the country aims to attain food self-sufficiency.

Moderate Diversification: Sodrugestvo is primarily a soybean processor but has some product diversification due to its rapeseed crushing operations and growing trading of wheat, barley and corn, which together accounted for 30% of total sales volumes in FY16. In terms of geographic diversification, Sodrugestvo remains reliant on profits from its core Russian market, while Brazilian operations remain insignificant.

Moderate Rouble Depreciation Impact: Sodrugestvo's debt is primarily in US dollars and most of its profits are generated in roubles, but there is some natural hedging due to the linkage of soybean and grain prices to world US dollar-based prices. However, Sodrugestvo's pricing power may deteriorate if rouble weakness offsets the benefit of low world soybean meal prices.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:

- Double-digit decline in global agricultural commodities prices in FY17, before stabilising

- Around 10% CAGR of trading volumes over FY17-FY20

- EBITDA of around USD140m-USD150m over the medium term

- Government interest-rate subsidies at around USD20m per year

- Capex and acquisition spending not exceeding USD40m-USD50m per year

- No cash dividends being paid out to the controlling shareholder

- No prepayments under the shareholder loan

- Adequate access to external liquidity

RATING SENSITIVITIES

Not applicable.

LIQUIDITY

Weak Liquidity: As a soybean processor and agricultural commodity trader, Sodrugestvo depends on the availability of working-capital financing, which leads to high short-term debt. At FYE16, its liquidity was weak as Fitch-adjusted unrestricted cash balances of USD30m and readily marketable inventory (soybeans and grain), which we estimated at USD327m, were insufficient to cover USD724m short-term debt. At FYE16 the company had USD246m of undrawn committed credit facilities. These mature in FY17 and due to their short-term nature Fitch excludes them from its calculation of liquidity sources. Nevertheless, such lines may support Sodrugestvo's intra-year liquidity needs.

FULL LIST OF RATING ACTIONS

Sodrugestvo Group S. A.

-- Long-Term Foreign-Currency IDR: affirmed at 'B-'; Outlook Stable; withdrawn

-- Long-Term Local-Currency IDR: affirmed at 'B-'; Outlook Stable; withdrawn

-- National Long-Term Rating: affirmed at 'BB-(rus)'; Outlook Stable; withdrawn