OREANDA-NEWS. Fitch Ratings has affirmed Ukraine-based Avangardco Investments Public Limited's (Avangardco) Long-term foreign currency Issuer Default Rating (IDR) at 'CCC'. Fitch has also affirmed the company's Long-term local currency IDR at 'B-' with Negative Outlook.

The affirmation reflects the political and economic uncertainty in Ukraine, including Avangardco's exposure to Eastern Ukraine regions, which may ultimately threaten the group's financial flexibility and its ability to meet its debt obligations. Nevertheless, Fitch note significant headroom in the ratings supported by Avangardco's low leverage, even accounting for a negative impact from hryvna devaluation on EBITDA, as well as growing exports and a high portion of cash accumulated for Eurobond repayment in 2015, mostly held outside Ukraine.

KEY RATING DRIVERS
Linkage to Sovereign Rating
Avangardco's ratings are constrained by Ukraine's Country Celling of 'CCC', reflecting the uncertain regulatory, tax and operating environment, including the ability of Ukrainian corporates to access foreign currency. Fitch also note Avangardco's exposure to the Donetsk and Luhansk regions, which contributed around 19% to group revenues in 2013.

Limited Impact from Guarantee to ULF
Fitch consider that the unconditional and irrevocable suretyship to its parent's (UkrLandFarming PLC; ULF) Eurobond issue is neutral for Avangardco's credit profile, although Fitch recognise strong legal and strategic ties between the companies. Fitch expect that ULF's operational and financial standalone profile will remain strong and therefore the risk of claim under the suretyship would be remote.

Fitch estimates that even accounting for ULF's USD500m bond as a contingent liability, Avangardco's funds from operations (FFO) adjusted net leverage would be commensurate with the 'B' rating category, without the sovereign rating constraint. In our recovery analysis Fitch continue to treat the ULF Eurobond as senior unsecured and expect above-average recovery prospects for unsecured creditors at the Avangardco level, capped at 'RR4' for the Ukraine jurisdiction.

Hryvna Devaluation Vulnerability
Avangardco benefits from a strong position in the domestic market for shell eggs, where the group generates nearly 70% of its revenue. However significant hryvnia depreciation starting 2014 will diminish domestic revenues when converted into US dollars and reduce the group's ability to service its debt, which is predominantly in hard currency. Nevertheless, with low leverage as of end-2013, Avangardco is well positioned to avoid any problems with debt servicing and Fitch expect FFO fixed charge cover to remain at 5x-7x in 2014-2015.

Growing Export Improves Risk Profile
Fitch considers export growth is critical for further development and improvement of the company's business risk profile and expects an increase in export's share of revenue up to 45% in the medium term (29% in 2013). This growth will be supported by the company's proactive work towards extending its presence in export markets and sufficient production capacity at newly constructed plants.

RATING SENSITIVITIES
Negative: Future developments that could lead to negative rating action on the Long-term local currency IDR include:
- Liquidity shortage caused by limited available bank financing of working capital investments or by refinancing at more onerous terms than expected.
- An increase in consolidated FFO adjusted gross leverage to 3.5x on a sustained basis.
- FFO fixed charge cover weakening below 2.5x.

Positive: An upgrade of the local currency IDR would only be possible if Fitch considers there has been a sustained improvement in the issuer's operating environment. An upgrade of the foreign currency IDR would only be possible if Ukraine's Country Ceiling was raised.