Nordic Credit Rating (NCR) said today that it had assigned a 'BBB' long-term issuer credit rating to Norway-based Lerøy Seafood Group ASA (Lerøy). At the same time NCR assigned an 'N-1+' short-term issuer rating. The outlook is stable.
Rating rationale
The rating reflects Lerøy's relatively strong market position in the profitable salmon farming industry. It also reflects the breadth of its operations as a fully integrated seafood producer with significant wildcatch, processing and distribution capabilities. It further reflects the company's moderate financial leverage and strong cash flow, which will allow it to maintain a high level of investment, if necessary, to keep up with technological developments and create revenue growth.
The rating is constrained by the seafood sector's historical earnings volatility due to unstable prices, primarily as a result of variable supply, although reduced demand since the outbreak of COVID-19 has also had an impact. The sector also faces environmental and disease-related challenges, with Lerøy particularly impacted by higher costs for sea lice and winter wounds, which we expect will trigger investment in new farming technology. These factors have contributed to volatile EBITDA margins despite strong credit metrics. However, we note that salmon is a healthy food product, with a significantly lower environmental footprint than many other sources of protein.
Stable outlook
The outlook is stable, reflecting our view that the COVID-19 pandemic will subside, increasing demand for seafood and so support salmon prices. We also expect lower supplies from Chilean producers to support prices globally over the next three years. In addition, we believe that Lerøy will keep adverse biological factors under control. Although we expect the seafood sector to face high investment requirements, we think that the company will maintain a prudent approach to acquisitions. We could raise the rating to reflect more stability in supply leading to reduced price uncertainty, lower dividends and/or investments leading to debt/EBITDA below 1x, or reduced costs and improved margin stability due to reduction of biological problems. We could lower the rating to reflect an increase in biological problems, higher financial leverage leading to debt/EBITDA above 2.5x, or lower demand for Norwegian and Atlantic salmon.
| Rating list | Rating |
|---|---|
| Long-term issuer credit rating: | BBB |
| Outlook: | Stable |
| Short-term issuer credit rating: | N-1+ |
If you have any questions, please contact:
Geir Kristiansen, credit rating analyst, +4790784593, geir.kristiansen@nordiccreditrating.com
Mille O. Fjeldstad, credit rating analyst, +4799038916, mille.fjeldstad@nordiccreditrating.com
The methodology documents used for this rating are NCR's Corporate Methodology published on 14 Aug. 2018 and NCR's Rating Principles published on 16 Sep. 2019. For the full regulatory disclaimer please see the rating report.