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 and 'BBB' senior unsecured issue rating were also affirmed.
Rating rationale
NCR has reviewed the ratings on Lerøy in view of a government proposal for a 40% "resource rent" tax on the production of salmon and trout from 1 Jan. 2023. In our view, the proposed tax would be slightly credit negative but the likely impact on cash flow metrics would be moderate and could be mitigated by lower dividend payments to shareholders.
A portion of the proposed tax would come from an increase in a production fee introduced in 2021, which we consider an operating cost that directly reduces EBITDA. Most of the impact would come from a new cash flow tax compensating society for the exploitation of natural resources, similar to taxes already imposed on domestic oil and energy companies.
The levy would be based on revenues and net of investments associated with sea-based farming operations. Consequently, the likely actual impact on cash flow is currently unclear. In addition, we see a risk that the proposal, in its current form, would be based on spot prices, which can be higher or lower than contracted prices. The discrepancy could negatively affect Lerøy's ability or willingness to sign long-term customer contracts.
We expect that the proposed increase in the production fee would have only a modest impact on EBITDA. However, we anticipate that the cash flow levy would likely reduce Lerøy's funds from operations (FFO) and free operating cash flow metrics. Previously we projected NCR-adjusted FFO/net debt of more than 100% in both 2023 and 2024. We now believe the ratio could fall by as much as one-third due to higher tax payments, though uncertainty surrounds the actual level. We believe that shareholders will shoulder the brunt of the impact as the company reduces dividend payments in mitigation and possibly reconsiders its long-term investment plans.
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 annual average salmon prices for the 2022–2024 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 the proposed 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 rating to reflect greater stability of supply leading to reduced price uncertainty, or reduced costs and improved margin stability due to reduction of biological problems. We could lower the rating to reflect increased biological problems such as disease and sea lice, worsened credit metrics (net debt/EBITDA above 1.5x, interest coverage ratio below 15x, or net debt/EBITDA below 45% over a protracted period), or lower general demand for Norwegian and Atlantic salmon.
| 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 18 Feb. 2022, 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.