Nordic Credit Rating (NCR) said today that it had affirmed its 'BBB-' long-term issuer rating on Norway-based food producer Nortura SA. The outlook is negative. At the same time, the 'N3' short-term issuer rating was affirmed. The 'BBB-' senior unsecured issue rating and 'BB' subordinated debt issue rating were also affirmed.
Rating rationale
On 27 Oct. 2022 Nortura said in its second tertiary report that it had breached its net debt/EBITDA covenant and, at the same time, that it had received waivers from all affected counterparties for the covenant until year-end 2022.
Our rating affirmation reflects the fact that all affected counterparties have granted waivers for the covenant breach reported today and the expected covenant breach at year-end 2022, and that the covenants cover only 9.6% of outstanding debt at 31 Aug. 2022. Moreover, we believe that the breach will be temporary, and our earnings expectations for the full year 2023 and 2024 are unchanged. The breached covenant relates to outstanding term loans from the Nordic Investment Bank and Innovation Norway of NOK 235m, as well as the outstanding unutilised credit facilities of NOK 1.1bn, and we believe the waiver is indicative of these creditors' supportive stance towards the company. The covenant does not apply to Nortura's outstanding bonds, including the hybrid bonds, nor are there any cross-default clauses relating to covenant breaches. However, the breach, and the waiver, might impact financing costs going forward.
The breach of the net debt/EBITDA covenant is the result of weaker than expected EBITDA for the second tertiary period of 2022. High energy prices and lower sales volumes in the latter part of the period, due partly to higher cross-border trade, has led us to also revise down EBITDA expectations for the remainder of 2022. The company should be able to pass the bulk of the increased costs on to customers at its set dates for price adjustments in February and July. Nevertheless, given high energy prices and the seasonal build-up of working capital, we expect Nortura to need an extension of the covenant waiver for most of 2023. We believe the company's liquidity could come under significant pressure if unutilised credit facilities are discontinued.
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 improve margins, although we remain cautious on the outcome of these measures. The negative outlook also reflects our expectation that Nortura will need a covenant waiver extension for most of 2023, although we anticipate creditors remaining optimistic about Nortura's long-term ability to pass on higher operating costs to its customers.
We could lower the rating by one or several notches if the company fails to receive waivers of breached debt covenants in 2023 which could trigger cross-acceleration clauses on other debt. We could also lower the rating if NCR-adjusted net debt/EBITDA exceeds 4.0 or if EBITDA/net interest falls below 3.0x over a protracted period. The rating could also be lowered 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.
| Rating list | To | From |
|---|---|---|
| Long-term issuer credit rating: | BBB- | BBB- |
| Outlook: | Negative | Negative |
| Short-term issuer credit rating: | N3 | N3 |
| Senior unsecured issue rating: | BBB- | BBB- |
| Subordinated issue rating: | BB | BB |
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 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.