Nordic Credit Rating (NCR) said today that it had had affirmed its 'BBB+' long-term issuer rating on Norway-based Lerøy Seafood Group ASA. The outlook is stable. The 'N2' short-term issuer rating was also affirmed, while the issue rating on the company's senior unsecured debt was raised to 'BBB+' from 'BBB' in accordance with NCR's revised corporate rating methodology. The ratings are no longer under criteria review.
Rating rationale
The long-term issuer 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. The rating further reflects the company's moderate financial leverage and strong cash flow, which should 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 as a result of variable supply and the fact that salmon farmers are effectively price takers, particularly in recurring periods of oversupply. It is also constrained by environmental and disease-related challenges, with the industry 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.
Stable outlook
The stable outlook reflects our view that demand for salmon and low supply growth will support global prices over the next three years. We expect stable, high salmon prices over the 2023–2025 period, albeit with considerable seasonal variations. In addition, we believe that Lerøy will keep adverse biological factors under control. We expect that any cash flow reduction as a result of a proposed "resource rent" tax will be primarily offset by lower dividends, supporting continued strong credit metrics. However, the company's investment planning and business model could change if the tax is approved as currently proposed.
We could raise the ratings to reflect more stability in supply leading to reduced price uncertainty or reduced costs and improved margin stability due to fewer biological problems such as disease and sea lice.
We could lower the ratings to reflect an increase in biological problems or reduced demand for Norwegian and Atlantic salmon. We could also lower the ratings to reflect higher financial leverage leading to net debt/EBITDA above 1.5x, interest coverage below 10x, or FFO/net debt below 45% over a protracted period.
| Rating list | To | From |
|---|---|---|
| Long-term issuer credit rating: | BBB+ | BBB+ |
| Outlook: | Stable | Stable |
| Short-term issuer credit rating: | N2 | N2 |
| Senior unsecured issue rating: | BBB+ | BBB |
Contacts:
Geir Kristiansen, analyst, +4790784593, geir.kristiansen@nordiccreditrating.com
Gustav Nilsson, analyst, +46735420446, gustav.nilsson@nordiccreditrating.com
The methodology documents used for this rating are NCR's Corporate Rating Methodology published on 8 May 2023, NCR's Rating Principles published on 24 May 2022 and NCR's Group and Government Support Rating Methodology published on 18 Feb. 2022. For the full regulatory disclaimer please see the rating report.