Nordic Credit Rating (NCR) said today that it had affirmed its 'A-' long-term issuer rating on Norway-based salmon farmer SalMar ASA. The outlook is negative. The 'N2' short-term issuer rating and 'BBB+' senior unsecured issue rating were also affirmed.
Rating rationale
The affirmation reflects SalMar's continuing operational and financial performance, which is in line with our expectations, while the negative outlook reflects the potential for weaker credit metrics if the company's prospective acquisition of Norwegian salmon farmer NTS ASA goes ahead. We anticipate a final ruling from the European authorities in the fourth quarter; this is necessary if the transaction is to proceed. SalMar has reiterated its commitment to its long-term financial policy if the NTS acquisition proceeds but expects that the transaction could result in net debt/EBITDA exceeding 2x for up to two years. In its interim report SalMar stated that the transaction would also depend on positive due diligence findings and an absence of any material adverse change. In our view, a new government proposal to impose a 40% "resource rent" tax on the sea-based production of salmon and trout from 1 Jan. 2023 could qualify as such a change. Consequently, the negative outlook also reflects the likely impact the proposed tax on SalMar's cash flow metrics.
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 (in 2021, SalMar reported a NOK 68.5m charge for this fee). 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, is based on spot prices, which can be higher or lower than contracted prices. The discrepancy could negatively affect SalMar'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 erode SalMar's funds from operations (FFO) and free operating cash flow (FOCF) metrics. Previously we projected NCR-adjusted FFO/net debt of about 60% in 2023 and 2024 and NCR-adjusted FOCF/net debt of about 35% in 2023 and 2024. We now believe these ratios 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.
Negative outlook
The negative outlook reflects our view that SalMar's financial leverage could increase substantially and net interest coverage weaken upon completion of the NTS acquisition. We believe the transaction could permanently weaken the company's financial ratios, effectively offsetting any operational benefits such as increased scale. 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 lower the rating to reflect deteriorating credit metrics (net debt/EBITDA above 2.0x, interest coverage below 15x, or FFO/net debt below 45%) over a protracted period, or a more aggressive financial risk appetite. We could revise the outlook to stable if SalMar were actively to commit to keeping NCR-adjusted net debt/EBITDA permanently below 2.0x after the acquisition of NTS, while maintaining strong interest coverage ratios above 15x and FFO/net debt above 45% over a protracted period.
| Rating list | To | From |
|---|---|---|
| Long-term issuer credit rating: | A- | A- |
| Outlook: | Negative | Negative |
| 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.