OREANDA-NEWS. Fitch Ratings has revised the Outlook on Russia-based Agribusiness Holding Miratorg LLC's (Miratorg) Long-Term Issuer Default Rating (IDR) to Positive from Stable and affirmed the IDR at 'B'. The National Long-term rating has been upgraded to 'BBB+(rus)' from 'BBB(rus)'.

The revision of the Outlook to Positive reflects Fitch's expectation that Miratorg's free cash flow (FCF) generation will be positive and strong from 2015, leading to significant deleveraging over the next three years.

The Positive Outlook also reflects Fitch's view of reduced cash support from Miratorg for the unconsolidated poultry and beef projects, as they become operational in 2014 and no longer require substantial capex. Fitch expects Miratorg will continue to grow and achieve EBITDAR of around USD600m by 2015 which, together with greater product diversity and improving credit metrics, will be more commensurate with a higher rating. In addition the Positive Outlook reflects Fitch's expectation that the company will successfully refinance its short-term debt maturing in 2014.

KEY RATING DRIVERS
Weakening but Still Solid Profitability
Miratorg's Fitch-calculated EBITDA margin decreased to 30% in 2013 from 35% in 2012, as higher fodder prices and increased SG&A (selling, general and administrative expenses), failed to be passed on to customers due to falling prices in Russian meat market. We expect Miratorg's gross margin to improve in 2014 due to stabilisation of meat prices and cheaper input costs. However, EBITDA margin may drop further to around 25% over 2014-2017, as the company starts to distribute beef and poultry produced by related parties - which are lower margin than internally produced meat - and incurs higher marketing, advertising and transportation expenses for more value-added products. Nevertheless, Miratorg's EBITDAR profitability should remain high relative to non-vertically integrated international peers.

Vertically Integrated Business Model
Miratorg's business covers nearly the entire meat production process - from crop growing and fodder production to livestock breeding, meat processing and product delivery. This results in lower business risks through control over the production cycle. This advantage is, however, offset by limited diversification outside of its core pork business. However, we positively view Miratorg's ongoing diversification to high value-added semi-finished goods in the longer term.

Lower Risks of Related-Party Projects
Although Miratorg has, over the last few years, made progress towards simplifying its group structure, two other businesses - poultry and beef - are still outside of consolidation scope and have been supported by Miratorg with cash and a guarantee on a project finance basis (poultry only). Contingent liabilities and possible cash requirements of unconsolidated projects create additional risks for Miratorg's operations. However, these risks are being reduced as these projects become operational in 2014 following heavy investments.

Lower Capex to Drive Deleveraging
We expect Miratorg to cut capex substantially starting from 2015 as major investment projects are completed. However, working capital investments are likely to remain high in 2014 and 2015 to support new capacity additions. Lower capex and reduced cash support for off-balance-sheet projects would allow Miratorg to generate FCF in at least the high-single digits from 2015 (including poultry). We therefore expect strong deleveraging in 2015-2017, despite some shrinkage in the operating margin.

A positive rating action is predicated on Fitch's modelled FFO-adjusted leverage falling to 1.5x by 2017 (2013: 5.3x). However, this calculation excludes the effect of debt and profits of guaranteed but not consolidated projects. Even after including poultry, we estimate FFO-adjusted leverage would only be 2.1x by 2017. These leverage metrics, if maintained, along with FFO fixed charge cover likely to exceed 3.0x by 2017, would be compatible with a higher rating which we at present estimate would not exceed by more than one notch.

Rollover of Major Short-term Maturities
At end-2013 Miratorg's cash, undrawn committed lines and expected FCF were insufficient to cover RUB32.5bn short-term debt. However, the major part of this debt is represented by maturing working capital facilities, especially for its grain-growing business, which are usually of one-year tenor. We expect Miratorg to extend these facilities upon maturity due to its strong and long-standing relationships with many state-owned Russian banks. We note that achieving and maintaining food self-sufficiency remains a key objective of the Russian government and we expect that state support for agricultural producers will be maintained. Given the current weak bond market environment, we expect the RUB3bn bond maturing in July 2014 to be replaced with bank funding.

RATING SENSITIVITIES

Positive: Future developments that could lead to an upgrade include:
-Gross FFO adjusted leverage sustainably below 3.5x (excluding poultry)
-FFO fixed charge cover above 3x
-Evidence of positive FCF, diminishing cash support for off-balance-sheet projects and management's commitment to a conservative capital structure
-Refinancing of short-term debt maturities at reasonable terms

Negative: Future developments that could lead to the Outlook being revised to Stable include:
-Lack of evidence of deleveraging in FY14 and higher-than-expected cash support for outstanding off-balance-sheet projects

Negative: Future developments that could lead to downgrade include:
-Gross FFO adjusted leverage consistently toward 5x or worse (excluding poultry)
-FFO fixed charge cover below 2x
-FCF consistently negative driven by, for example, sustainable deterioration in EBITDA margin
-Liquidity shortage caused by the limited availability of bank financing in relation to short-term maturities or refinancing at more onerous terms than expected