Nordic Credit Rating (NCR) said today that it had lowered its long-term issuer rating on Norway-based salmon farmer SalMar ASA to 'BBB+' from 'A-'. The outlook is stable. At the same time, the short-term issuer rating was lowered to 'N3' from 'N2' and the senior unsecured issuer rating was lowered to 'BBB' from 'BBB+'.
Rating rationale
The rating action reflects our view that SalMar's leverage will increase following its recent merger with NTS ASA (NTS) due to NTS' higher leverage. We consider SalMar's current leverage to be moderate and estimate pro-forma NCR-adjusted net debt/EBITDA at around 2.5x at the time of the merger. However, we project that the metric will fall below 2x in the course of 2023. In addition, we expect the likely increase in debt to have an even larger impact on SalMar's NCR-adjusted EBITDA/net interest, which we project will fall to 8x in 2023 compared with our previous expectation of 24x, partly in combination with higher interest rates. We also expect SalMar's NCR-adjusted funds from operations/net debt to fall to about 40% from our earlier expectation of 62%. Norway's implementation of a planned "resource rent" tax in 2023 will add additional pressure to this metric when payments begin in 2024. In our forecast, we assume that SalMar will pay no dividend in respect of 2022 and reduce leverage by selling non-strategic assets, in addition to the previously announced sale of NTS subsidiary Arctic Fish.
While we expect SalMar to reduce leverage over the longer term, we believe that the debt-financed NTS merger reflects an increase in the company's financial risk appetite. We also expect the merger to reduce operating efficiency, given NTS' lower EBITDA, particularly at subsidiary Norway Royal Salmon.
Positively, we expect the merger to increase SalMar's harvest volumes by about 30% and give SalMar a clear position as the second-largest salmon company in the world. We expect further benefits of the merger as SalMar introduces operational best practice, reducing costs and increasing margins in the acquired companies.
Stable outlook
The stable outlook reflects our view that low supply growth will support global salmon prices over the next three years. We expect average prices of around NOK 75 per kg over this period, albeit with marked seasonality. In addition, we believe that SalMar will successfully integrate NTS into its operations and thereby create synergies. From 2023 our forecasts reflect our estimates of the effect of the Norwegian government's proposed "resource rent" tax. We generally believe that shareholders will bear the brunt of the impact, as the company reduces dividend payments to mitigate the impact on cash flows and reconsiders its long-term investment plans.
We could raise the rating to reflect lower leverage, resulting in NCR-adjusted EBITDA/net interest above 15x and NCR-adjusted net debt/EBIDTA below 1.5x for a protracted period, combined with a continued strong outlook for salmon prices.
We could lower the rating if higher leverage becomes permanent, for example if EBITDA/net interest remains below 10x or NCR-adjusted net debt/EBITDA remains above 2x for a protracted period. In addition, we could lower the rating to reflect increasing biological problems, such as disease and sea lice, or a general fall in demand for Atlantic salmon.
| Rating list | To | From |
|---|---|---|
| Long-term issuer credit rating: | BBB+ | A- |
| Outlook: | Stable | Negative |
| Short-term issuer credit rating: | N3 | 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.