Nordic Credit Rating (NCR) said today that it 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 and the 'BBB+' issue rating on the company's senior unsecured debt were also affirmed.
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 treating 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 low supply growth will support global salmon prices over the next three years. We expect average prices of around NOK 94 per kg over this period, assuming a stable EUR/NOK currency rate, albeit with marked seasonality. We believe that shareholders will bear the brunt of the impact of a recently imposed "resource rent" tax on salmon farming in Norway, as we expect that the company will reduce dividend payments to offset the negative impact and/or reconsider its long-term investment plans.
We could raise the rating to reflect more stability in supply and less price uncertainty, or lower costs and improved margin stability due to fewer biological problems.
We could lower the rating to reflect an increase in biological problems such as disease and sea lice, or higher financial leverage leading to net debt/EBITDA above 1.5x, interest coverage below 10x, or funds from operations/net debt below 45% over a protracted period. We could also lower the rating to reflect lower demand for Norwegian and Atlantic salmon in general.
| 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
Christian Yssen, analyst, +4740019900, christian.yssen@nordiccreditrating.com
Elisabeth Adebäck, analyst, +46700442775, elisabeth.adeback@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 14 Feb. 2024 and NCR's Group and Government Support Rating Methodology published on 14 Feb. 2024. For the full regulatory disclaimer please see the rating report.