Fitch Ratings – Moscow – 13 Jul 2020: Fitch Ratings has affirmed Aragvi Holding International Limited’s (Trans-Oil) Long-Term Foreign-and Local-Currency Issuer Default Ratings (IDRs) at ‘B’ with Stable Outlooks.

The ‘B’ ratings are constrained by Trans-Oil’s small scale in the global agricultural commodity processing and trading market and the concentration of its crops origination in Moldova. The ratings also reflect Trans-Oil’s dominant and well-protected market position in procurement and exports of agricultural products and sunflower seed crushing in Moldova and our expectation that the company will continue expanding the scale of its operations over the next four years, while maintaining moderate leverage. The company maintains an adequate liquidity position.

KEY RATING DRIVERS

Limited Impact from Pandemic: We assume no disruptions from the coronavirus pandemic as the demand for agricultural commodities sold by Trans-Oil has been resilient during global lockdowns. The company has limited exposure to foodservice and biodiesel markets and therefore has not experienced any contract cancellations.

Increased EBITDA: We estimate that Trans-Oil’s EBITDA has increased by almost 50% over FY19-FY20 and reached around USD90 million in FY20 (FY18: USD60 million). This has been achieved mainly thanks to substantial growth in the company’s origination volumes, despite its already high market shares in Moldova. Improved liquidity after the USD300 million Eurobond placement in 2019 enabled Trans-Oil to finance the purchase of a greater volume of agricultural commodities compared with previous years, leading to an estimated around USD200 million step-up in sales of origination division in FY20 from USD327 million in FY18.

In addition, Trans-Oil started to expand its operations outside Moldova, in Romania, with the purchase of a crushing plant for sunflower seeds. We expect this to contribute USD40 million of sales in FY20.

Growth to Continue: Over FY21-FY22 we expect increasing utilisation of the plant in Romania, along with the potential development of a new organic and high-oleic seeds crushing operation in Moldova to be the company’s major growth drivers. Management has ambitions to continue growing, but we assume any investments in new production capacity or bolt/on M&A will be done in the context of the current conservative financial policy.

Working Capital Investments in FY19-FY20: We assume in our rating case that Trans-Oil’s working capital will stabilise over FY21-FY23, based on the current credit lines available to the company. Nevertheless, we do not rule out that Trans-Oil may invest in its inventory if new working capital financing becomes available. This will lead to negative FCF but also to higher revenue than projected. However, we believe that new debt raised to fund inventory will not materially impact our leverage metrics, because they are adjusted for Readily Marketable Inventory (RMI).

We project RMI-adjusted funds from operations (FFO) net leverage to be around 4.0x in FY20 and stay at this level in FY21, below the negative rating sensitivity of 4.5x.

Strong Market Position in Moldova: Trans-Oil’s dominant market position in Moldova’s agricultural exports and sunflower seed crushing underpins its rating. In 1HFY20, Trans-Oil exported 53% of agricultural commodities in Moldova and accounted for 90% of sunflower seeds crushed in the country. Trans-Oil’s major competitive advantage is its ownership of material infrastructure assets as it operates the country’s largest inland silo network and the only seagoing vessel port.

Trans-Oil has higher profit margins than most Fitch-rated peers in the sector due to its asset-heavy business model, strong shares in its procurement market and a more limited incidence of logistics costs thanks to the less dispersed profile of the territory where it procures.

Low to Moderate Competition Risks: Trans-Oil’s dominant market position creates substantial market entry barriers for new competitors and ensures the company’s smooth access to crops procurement in the country. Due to its market position in Moldova, Trans-Oil benefits from significantly lower competition risks in procuring crops than its peers operating in Russia and Ukraine, the two largest crop-producing countries in the Black Sea region. This is due to higher market consolidation and the absence of international commodity traders and processors in Moldova.

Fitch does not expect the competitive environment in Moldova to materially change over the medium term.

Small Scale, Limited Diversification: Trans-Oil’s rating is constrained by its small scale and concentration of crops procurement in Moldova, which exposes its supply chain to weather risks due to the limited territory. Trans-Oil is large by Moldovan standards-about 10x bigger than the next local competitor -but is small in the global agricultural commodity trading and processing market. Trans-Oil’s scale (as measured by FY19 EBITDAR of USD75 million) is more than 5x lower than that of Ukrainian peer Kernel Holding S.A. (BB-/Stable). In addition, around 90% of Trans-Oil’s revenue is from trading a small selection of commodities (sunflower seeds and oil, corn and wheat).

RMI Adjustments: Fitch applies RMI adjustments in evaluating Trans-Oil’s leverage and interest coverage ratios and liquidity position. Certain commodities traded by Trans-Oil fulfil the eligibility criteria f or RMI adjustments, as set out in Fitch’s Commodity Processing and Trading Companies: Ratings Navigator Companion report dated October 2018, as 90% of the company’s international oilseeds and grain sales volumes are made on the basis of forward contracts.

For the purpose of RMI calculations, we applied a 60% advance rate to eligible inventory to reflect basis and counterparty risks. In our calculation of leverage and interest cover metrics, we excluded debt associated with financing RMI and reclassified the related interest costs as cost of goods sold. The differential between RMI-adjusted and RMI-unadjusted FFO net leverage is 0.5-1.0x.

DERIVATION SUMMARY

Trans-Oil compares well with Ukrainian sunflower seed crusher and grain trader Kernel Holdings S.A. due to the similarity of operations and vertically-integrated models, which include sizeable logistics and infrastructure assets. The main difference in business models being that Kernel is integrated into crop growing, which limits sourcing and procurement risk, and has a wider and diversified customer base. The two-notch differential between the companies’ ratings is explained by Kernel’s greater business scale and larger sourcing market, which provides greater protection from weather risks. On the other hand, procurement competition risks for Trans-Oil are lower than Kernel’s due to its stronger market position and absence of competition from global commodity traders and processors in Moldova.

Trans-Oil is considerably smaller in business size and has a weaker ranking on a global scale than international agricultural commodity traders and processors, such as Cargill Incorporated (A/Stable), Archer Daniels Midland Company (A/Stable) and Bunge Limited (BBB-/Stable).

No Country Ceiling, parent-subsidiary linkage or operating environment aspects apply for Trans-Oil’s ratings.

KEY ASSUMPTIONS

-Increasing crushing capacity utilisation over FY21-FY23, including crushing plant in Romania

-Construction of a high-oleic and organic seeds crushing plant with capacity coming on stream in FY21

-Maintaining the ability to preserve FY20 profit margins in the origination and crushing segments

– From FY20, EBITDA at approximately EUR90 million a year in the absence of commodity market shocks

-Capex at around 2% of revenue in FY20-FY21, at 1% of revenue in FY22-FY23

-Large working capital outflow in FY20 (around USD100 million) with stabilisation in FY21 and outflows not exceeding USD10 million-USD15 million a year over FY21-FY23 (assuming low single-digit revenue growth)

-No M&A

-No dividends

RECOVERY ASSUMPTIONS

Adequate Recovery for Secured Bondholders: The senior secured Eurobond is rated in line with Trans-Oil’s IDR of ‘B’, reflecting average recovery prospects given default. The Eurobond is secured by pledges over substantially all assets of key Moldovan entities. It also benefits from guarantees from operating companies, altogether accounting for no less than 85% of Trans-Oil’s EBITDA and assets at the issue date.

Going-Concern Scenario: Our recovery analysis assumes that Trans-Oil would be treated as a going concern in a restructuring and that it would be reorganised rather than liquidated. We have assumed a 10% administrative claim. The going-concern EBITDA estimate of USD50 million reflects Fitch’s view of a sustainable, post-reorganisation EBITDA level upon which we base the valuation of the company. It incorporates the company’s limited diversification and the inherent volatility of agricultural commodity markets. An enterprise value (EV) multiple of 4x is used to calculate a post-reorganisation valuation. The multiple is in line with that used by Fitch for recovery analysis of Ukrainian agricultural company MHP SE (B+/Stable).

We deem the outstanding amount under its PXF facility, other working capital financing and debt owed to International Investment Bank as ranking pari passu with the issued bonds. Our debt waterfall analysis generated a ranked recovery in the ‘RR4’ band f or the senior secured Eurobond, indicating a ‘B’ rating. The waterfall analysis output percentage on current metrics and assumptions was 41%.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Positive rating action is currently not envisaged. Nevertheless, factors that we consider relevant for potential positive rating action include steady growth in Trans-Oil’s operational scale (as measured by FFO), improvement of diversification by commodity and sourcing market, and maintaining a conservative capital structure.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

– Weakening of liquidity position or risk of insufficient availability of trade finance lines to fund trading and processing operations

– A more aggressive financial policy, as evidenced by greater-than-expected investments in working capital, capex and M&A or dividend payment

– RMI-adjusted FFO net leverage above 4.5x (FY19: 3.7x) and RMI-adjusted FFO interest cover below 2.0x (FY19: 3.6x) for more than two consecutive years.

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

Adequate Liquidity: At end-December 2019, we estimate that the company held USD65 million of cash and RMI of USD158 million, sufficient to cover projected short-term obligations, including USD136 million of short-term debt. We expect Trans-Oil to be able to maintain adequate internal liquidity over the next three years due to manageable debt maturities before its Eurobond becomes due in 2024. We also assume that Trans-Oil will extend its USD150 million pre-export financing (PXF) facility on maturity in end-July 2021. We believe that refinancing risks are manageable due to projected moderate leverage and Trans-Oil’s record of re-establishing and increasing the limit of PXF facility since it was obtained in July 2014.

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

The highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on Fitch’s ESG Relevance Scores, visit www.fitchratings.com/esg.

Additional information is available on www.fitchratings.com