Nordic Credit Rating (NCR) said today that it had raised its long-term issuer rating on Norway-based Lerøy Seafood Group ASA to 'BBB+' from 'BBB'. The outlook is stable. At the same time NCR raised the short-term rating to 'N2' from 'N3' to reflect the company's strong liquidity position and raised the senior unsecured issue rating to 'BBB' from 'BBB-'.
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 the company's operations as a fully integrated seafood producer with significant wildcatch, processing and distribution capabilities. The rating further reflects Lerøy'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 higher rating reflects a 2-notch increase in our assessment of the company's key financial ratios.
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. However, we anticipate price reversion from extraordinary levels of above NOK 100 per kg achieved during the first half of 2022. 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 believe that the company will maintain a prudent approach to acquisitions. 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, higher financial leverage (leading to net debt/EBITDA above 1.5x over a protracted period), or 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 | N3 |
| 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 Group and Government Support Rating Methodology published on 18 Feb. 2022 and NCR's Rating Principles published on 24 May 2022. For the full regulatory disclaimer please see the rating report.