Weekly Credit Risk Monitor /

Weekly Credit Risk Monitor

    Stuart Culverhouse
    Stuart Culverhouse

    Head of Sovereign & Fixed Income Research

    Tellimer Research
    30 May 2019
    Published by

    In Focus: Kernel – Good results, mixed outlook 

    Kernel reported strong financials with the top line driven by expanding trading operations, and EBITDA supported by high yields in the farming segment. A seasonal decrease in inventory and corresponding release of working capital alongside a 45% surge in EBITDA helped to reduce net leverage to 2.5x. Both short- and long-term funding is ready for the new season and US$340mn capex is planned in the financial year starting July 2019. We like Kernel’s credit profile, but we don’t expect KERPW 22s to outperform MHPSA despite an optically wide spread. Kernel’s earnings volatility is higher than MPH’s, while both companies are in the middle of investment cycles and are unlikely to focus on deleveraging in the next 12-18 months. We reiterate our Hold. 

    Revenues continue to grow on trading. As Kernel’s financial year is coming to an end, the company continues to show what its new turnover will look like. In nine months, Kernel increased grain trading volume from 3mt to 8mt after the company launched its proprietary trading unit Avere. Consolidated revenue almost doubled yoy as a result, but not without the contribution of the oilseeds processing and farming segments. The latter has seen a strong year due to substantially higher yields achieved on the new acreage added in 2017. In the nine months ended Q1 19, Kernel’s revenues came to US$3.1bn and were rearranged into three enlarged segments: infrastructure and trading, oilseed processing, and farming, with the latter earning US$0.5bn in revenues for the business. 

    Farming and oilseed processing drive EBITDA. Kernel’s EBITDA for the nine months ended 1Q 19 increased 45% yoy to US$285mn and is likely to reach US$320-340mn in FY 19. The EBITDA margin was diluted by a major expansion of trading operations, but the farming segment delivered outstanding results, doubling its profitability and emerging as the key drive of consolidated performance. The outlook for the next financial year is mixed, as positive sentiment in corn and wheat has yet to show in the numbers sufficiently to offset tightening sunflower crushing margins. 

    Seasonally lower net leverage. The net debt to EBITDA ratio reduced to 2.5x due to a seasonal release of the working capital and higher EBITDA. The company’s access to liquidity is sufficient to meet its operating and investment requirements. Out of US$306mn in long-term loans raised at the end of 2018 and early 2019, US$256mn remain unutilised. On top of that, cUS$200mn are available under the revolving working capital facilities due 2021.  

    Leverage could increase on capex next year. Kernel expects to spend US$350mn on capex in July 2018-June 2019, which is lower than the US$400mn guided previously. The shortfall will be moved to the following year when the company expects to invest US$350m in a grain export terminal, a new oilseed crushing plant and the upgrade of its existing crushing facilities. Total debt is likely to increase by up to US$200mn as the company gradually utilises long-term debt facilities to finance capex. Operating cash flows should cover the balance of required financing, even if profitability is challenged by soft commodity prices and crushing margins in 2019-20. 

    Read the full report here.

    Recap of the week’s key credit developments

    Ghana (GHANA): On Monday, the monetary policy committee (MPC) of the Bank of Ghana kept its policy rate unchanged at 16%, as expected. According to the Bank, headline inflation increased to 9.5% in April (target 6%-10%), reflecting the effects of a currency depreciation in Q1 following an unexpected rate cut in January, while core inflation eased. The next MPC meeting is scheduled for 17-19 July, with the policy announcement on July 22.

    Kenya (KENINT): Also on Monday, the Central Bank of Kenya MPC kept its policy rate at 9%, the same since July 2018. Inflation yoy in March and April was 4.4% and 6.6%, respectively. The rise in inflation in April was mainly due to food prices – food inflation was 7.7% in April (2.9 % in March), while inflation excluding food and fuel stayed below 5%. The Bank’s next meeting is expected in late-July.

    Ukraine (UKRAIN): In an interview with the FT published on 27 May, Igor Kolomoisky – the oligarch and alleged backer of new President Volodymyr Zelensky – called for Ukraine to reject the IMF programme and default on its external debt. Perhaps supported by public holidays at the time, the market impact was surprisingly benign, but the comments may highlight the challenges faced by the new president in balancing competing interests, although investors will hope the influence of reformers in Zelensky’s team will moderate his plans and lead to market-friendly policies. Kolomoisky’s comments may also have been seen as an attempt to influence the tone of discussions ahead of the IMF’s first review of its new 14-month SBA, which was approved in December, or even to reset policy objectives.  

    Greece (GGB): Prime Minister Alexis Tsipras called snap parliamentary elections over the weekend following his party’s poor showing in the European Parliament and local elections. His left-wing Syriza party achieved 24% of the vote, trailing by some distance, the main opposition party the conservative New Democracy on 33%. Greek financial markets rallied in response. The election has been set for 7 July. 

    Metinvest (METINV): The company reported abridged financial results for Q1 19, which were negatively affected by weak steel prices and seasonality. Revenues were down by 5% yoy at US$2.7bn, EBITDA came in 33% lower yoy at US$435mn and EBITDA margin shrank to 15% (from 21% in Q1 18). If we extrapolate Q1 profitability to the rest of 2019, keeping other variables unchanged, we see a c30% decline in EBITDA and increase in leverage from 1.1x to 1.5-1.7x. Normalisation of iron ore prices could increase downward pressure on margins.  

    Access Bank (ACCESS): Following an unexpected delay, Access Bank has issued a notice calling the US$400mn ACCESS 9.25% subordinated bond. Management had stated – on a number of occasions – that the bond would be called. The call comes after the US$200mn Diamond Bank bond was repaid. Thus, in less than a month, the Access Bank group will have just one eurobond outstanding – the ACCESS 10.5% 2021 senior bond, to which we assign a Buy rating. 

    African Bank (AFRIBK): African Bank reported results for the six months to end-March 2019. Net income fell to ZAR69mn, from ZAR77mn a year ago. This yoy decline reflects weaker revenues – both net interest income and non-interest income declined. In addition, Stage 3 loans accounted for 26.9% of gross advances, up from 22.8% in October last year. If searching for positives (as we are), impairment charges fell 43% yoy, total Stage 3 loan coverage was 97%, deposit balances increased, the core Tier 1 ratio remains above 30% and the issuer has recently launched its transactional banking proposition, which should help boost revenues. We have Buy ratings on the two 2020 African Bank US$-denominated bonds.

    Ecobank Transnational (ETINL): The Group completed a US$50mn Reg S tap of the recently-issued 2024 US$-denominated bond. IPT was 8.50% area (equivalent to 103.9 price) and the tap priced at 8.25%. We have a Buy on the ETINL 2024 bond. 

    Bayport Management Ltd (BAYPRT): Bayport, a financial institution providing credit solutions, insurance and other financial services to customers in Africa and Latin America, has placed a US$260mn 3-year bond at 11.5% under a Social Bond Framework. Historically, BML has placed bonds in SEK, and in the local currencies of the countries in which it operates. A portion of the proceeds of the US$-denominated bond will be used to redeem two SEK-denominated securities. 

    Privatbank (PRBANK): As highlighted earlier, in an interview with the FT, Igor Kolomoisky stated that President Zelensky should “follow Greece by rejecting the International Monetary Fund’s austerity programme and defaulting on its external debt.” This interview comes after Kolomoisky stated that he would accept a stake of c25% in Privatbank as compensation for the State’s actions. Some have suggested that the comments may be some sort of ‘payback’ for the nationalisation of PRBANK. It’s not clear that the nationalisation of Privatbank was a requirement from the IMF, though it was supported by them, primarily to enhance financial stability. Further, the IMF has also emphasised the importance of recovering misappropriated assets – perhaps this is the issue. One may speculate endlessly on the rationale behind Kolomoisky’s latest statements. For PRBANK bondholders, if former owners are awarded any compensation at all – as Kolomoisky is still demanding – this is likely to strengthen the bondholders’ case, given that bonds clearly rank senior to equity.

    Turkish banks: Halkbank (HALKBK), Isbank (ISCTR) and Vakifbank (VAKBN): Turkish issuers continue to feature in the headlines. Key news items in the past week include: (a) Mehmet Emin Ozcan, who was CEO of Vakifbank, is now on the board of Halkbank, as Chairman of the Remuneration Committee. (b) Halkbank’s share buyback program has continued – the issuer purchased another TRY400mn at TRY6.30 each. (c) Isbank secured a new syndicate loan on May 23 – of EUR644.9mn and US$323.5mn. (d) Turkish authorities announced another support package last week. This time, TRY30bn will be made available through state banks to help support exporting sectors. (e) Foreign currency reserve requirements have increased again. (f) The main focus in Turkey is still on the potential delivery of military equipment from Russia. Bloomberg recently reported that there are signs from Turkey that this could now be delayed.