Flash Fixed Income Report /
Ukraine

Kernel: New US$300-350mn bonds

    Kiti Pantskhava
    Kiti Pantskhava

    Senior Credit Analyst

    Tellimer Research
    1 October 2019
    Published by

    Kernel is looking to issue new US$300-350mn bonds with maturity of 5-7 years. According to management, proceeds from the sale will be used to refinance short-term facilities and improve the term-structure of debt. The overall debt level is not expected to increase as a result of this transaction. We consider the 6.30-6.65% range for a 5yr and 6.50-6.90% range for a 7yr as fair, and looking increasingly attractive towards the upper end of the ranges.

    Credit overview. As of 30 June 2019, the end of Kernel’s financial year, the company reported US$4bn in revenues, posting an impressive 66% yoy growth driven by expanding grain trading operations. EBITDA increased 56% to US$346mn on the back of excellent performance of farming and recovery of oilseed processing businesses. Higher EBITDA caused net leverage to reduce to 2x. Peak US$300mn capex budgeted for 2020 is expected to mark the end of the current investment cycle, which has been focused on adding export and storage capacity, hedging costs via inhouse transport operations, and increasing energy efficiency with an environmentally friendly and economically beneficial power generation facility using sunflower husk as fuel. The next investment cycle could be associated with the acquisition of farmland once the relevant legislation is passed. In 2020, capex, cost inflation and subdued soft commodity prices could take net leverage to 2.5x or slightly higher, according to management.

    Pricing and peers. Kernel’s outstanding US$500mn 8.75% notes due 2022 are indicated at 5.82% (416bps z-sprd). At this level, the KERPW-UKRAIN spread is at c40bps and KERPW-MHPSA at c60bps, after adjusting for the difference in tenor. Kernel and MHP are the only two issuers in Ukraine’s agricultural sector: 

    • Kernel, a grain and oilseed grower, trader and sunflower oil processer, has low margins, high earnings volatility driven by soft commodity prices and significant seasonal working capital requirements. 
    • MHP, a vertically integrated protein producer (poultry) with grain farming used to support in-house fodder production, has high profitability, a long-term debt profile but higher leverage than Kernel. 

    We expect MHP's and Kernel's leverage to converge in 2020 as MHP’s focus has shifted to efficiency and integration of recent acquisitions, while Kernel has yet to complete its investment programme. Hence, we are comfortable using the KERPW-MHPSA spread as a starting point for pricing the new bonds.

    Taking the sovereign curve as the benchmark, we arrive at a 6.65%-7.15% (505-565bps z-spread) range depending on maturity. Given the difference in slopes of the sovereign and MHP yield curves, if the MHP curve is used as benchmark the range could be 6.30%-6.60%. We think KERPW is unlikely to price through the sovereign, though, and adjust the estimate to 6.5%-6.9% (490-545bps z-spread), to reflect at least a flat spread to the sovereign. The taste for long-dated Ukrainian corporate risk is about to be tested as METINV 29s final price is set (expected in high 7%).

    Mapping new KERPW against peers

    Source: Bloomberg, Tellimer Research


    Table 1: Kernel vs MHP (12m ended 30 Jun 19)
    US$mnMHPKernel

    Rating (M/S/F)

    B3/B/B+

    -/B/BB-

    Revenue

    1,808

    3,992

    EBITDA

    436

    346

    FCF (before dividends, M&A)

    200

    2

    EBITDA. %

    24%

    9%

    Net debt/EBITDA

    3.6x

    2.0x

    EBITDA/Interest

    3.8x

    4.5x

    Source: Company reports, Tellimer Research