Nordic Credit Rating (NCR) said today that it had revised its outlook on Norway-based food producer Nortura SA to negative from stable. At the same time, the 'BBB-' long-term and 'N3' short-term issuer ratings on Nortura were affirmed. The 'BBB-' senior unsecured issue rating and 'BB' subordinated debt issue rating were also affirmed.
Rating rationale
The outlook revision reflects the significant worsening of Nortura's financial metrics, both so far in 2022 and in NCR's forecast. The downturn in credit metrics is largely connected to Nortura's limitations in adjusting prices in accordance with the steeply rising costs seen so far in 2022, as it can only change prices twice a year at set dates. Due to its position as market regulator, and the requirements that come with that, Nortura has historically operated with very low margins. Combined with its price adjustment inflexibility, this makes the company particularly vulnerable to periods of rapid change, such as rising energy prices and inflation.
However, Nortura's solid market position and the relatively lower impact of decreased consumption on the food sector leads us to believe there is potential for Nortura to turn its financial performance around. We believe Nortura is strongly positioned to raise prices as required in 2023, although we are somewhat cautious about the effect this will have on sales volumes, as household budgets are increasingly constrained. In addition, we expect inflation to be lower next year in Norway, including on energy prices.
We adjust our standalone credit assessment up by one notch for peer calibration to reflect Nortura's position as market regulator, which adds stability that is not fully captured in our indicative credit assessment. Furthermore, Nortura is in the final phase of its ambitious investment plan, aimed at boosting operating efficiency, which should contribute to further improvements to margins over the next few years. In our view, the current high capital expenditure is transitionary, supporting the company's market role and profitability over time.
Negative outlook
The negative outlook reflects the adverse impact on Nortura's financial metrics from the steep inflation and high energy prices of 2022, resulting in decreasing gross and EBITDA margins. We believe the company is highly likely to offset higher costs through price increases in 2023 and that the roll-out of its strategic efficiency investments will boost margins, but we remain cautious on the outcome of these measures.
We could lower the rating if the company is in impending or actual breach of its debt covenants. We could also lower the rating if NCR-adjusted net debt/EBITDA exceeds 4.0x or EBITDA/net interest falls below 3.0x over a protracted period, or if Nortura faces losing its regulatory role and a decline in market position.
We could revise the outlook to stable if NCR-adjusted net debt/EBITDA falls sustainably below 4.0x and EBITDA/net interest sustainably exceeds 3.0x.
Contacts:
Geir Kristiansen, analyst, +4790784593, geir.kristiansen@nordiccreditrating.com
Ylva Forsberg, analyst, +46768806742, ylva.forsberg@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.