The credit rating of LLC “Center-reserve” (hereinafter, the Company) has been upgraded based on the Company maintaining the credit metrics within the range set for the rating level, coupled with the removal of the risk of Gazbank JSCB — represented by its bankruptcy trustee the Deposit Insurance Agency — filing a claim to the Samara Region Arbitration Court on the recognition of Inter-Impex LLC (the owner of a pig farm) as insolvent (bankrupt). In particular, Srednevolzhskaya Logistics Company LLC (one of the owners of the Company) purchased the debt of Inter-Impex LLC to Gazbank JSCB via an electronic auction.
The credit rating outlook has been changed fr om Stable to Developing to reflect the Agency’s expectations with regard to the further improvement of leverage and cash flow. The planned increase of revenues, and, as a result, FFO from launching a new meat processing facility will allow adjusted total debt to FFO before fixed payments to be reduced, while the expected fall in investments due to passing the peak of capital expenditures will lead to the FCF margin turning positive. At the same time, the Developing outlook reflects the possible risks of higher leverage amid delays or continued postponement of the launch of the aforementioned facility on the back of continued uncertainty regarding the actions of Srednevolzhskaya Logistics Company LLC with regard to the debt of Inter-Impex LLC. This may have a negative impact on the rating. The Company’s rating takes into account the very weak assessment of its business profile that stems from a lack of vertical integration and low product diversification, as well as it operating on leased production facilities. Information regarding the negative business reputation of the owners of the pig farm had a separate negative impact on the rating, and is reflected in the very low assessment of corporate governance.
High profitability had a positive impact on the financial risk profile assessment, while the medium assessments of leverage, coverage and liquidity had a negative impact. The small size of the Company and its weak cash flow are constraining factors.
The Company is a major pork producer based in the Samara Region. It can produce around 6,500 tons of pork a year. Pigs are farmed on leased production sites. The Company began operating in spring 2018.
G. I. Sanguliya, A. V. Timofeyeva, Y. V. Lopatin, and A. K. Ushamirsky are the beneficiary owners of the Company.
key assessment factors
Very weak operational risk profile assessment. The Company carries out production activities in a pig farm leased from Inter-Impex LLC. The Company has acquired its own breeding herd and can function with its own reproduction of livestock. At the same time, the Company does not have meat processing facilities or its own feed base, and its plans to launch a processing facility this year have been postponed until 2023. All the Company’s revenues come from selling pork in live weight and half carcasses. These factors are the reason why the Company continues to receive low assessments for vertical integration and product diversification. According to the Company’s projections, in H2 2022, around 14% of expected income for 2022 will be obtained by trading grain crops (barley, corn, sunflower). However, ACRA does not take this area of business into account when assessing the Company’s business profile, given the fragmented nature of this activity and the lack of certainty that it will continue over the forecast horizon. The Company continues to be one of the largest pork producers in the Samara Region; its geography of sales is limited by its presence in the regional market and an absence of exports. The assessment of corporate governance is driven by the presence (in the Agency’s opinion) of close links between the Company and Inter-Impex LLC, which purchased the assets of bankrupt pig farm Dominant in 2017 and put them into operation. The history of operation of the pig farm and the beneficiaries of Inter-Impex LLC features facts that indicate a negative business reputation, including the bankruptcy of Alikor Group (which began building the pig farm in 2006). According to ACRA’s methodology, these facts lim it the assessment of the Corporate Governance factor to a very low level.
The financial risk profile assessment takes into account both the historical indicators of the existing business, and the projected indicators of the new processing segment. Therefore, the assessment stems from high profitability, medium leverage, debt coverage and liquidity, as well as the weak cash flow and the small size of the Company.
The Company’s revenues continue to grow and reached RUB 773 mln in 2021, while weighted FFO before net interest payments and taxes was RUB 189 mln, which corresponds to a small size as per the Agency’s methodology. The weighted FFO margin before interest and taxes (from 2019 to 2024) will equal 16.8% according to ACRA’s estimates, which, among other things, is due to the forecasted dynamics of pork prices and the expected commissioning of the processing plant.
As the Company’s current business model involves pig farming at leased production sites, ACRA uses the indicators of adjusted total debt to FFO before fixed payments and FFO before fixed payments to fixed payments, which provide a clearer picture of the Company’s risks and its leverage.
The postponement of actions to finance the investment program by a year also impacted the growth of the Company’s loan portfolio. The ratio of adjusted total debt to FFO before fixed payments was 1.9x in 2021, while the weighted indicator for 2019–2024 is 2.3x. The debt service indicator (FFO before fixed payments to fixed payments) was 6.0x in 2021. The Agency expects this indicator to decline to 2.0x in 2022 and then grow to 3.4x in 2023. ACRA notes an improvement of the loan portfolio structure and an increase in its maturity. The Company has obligations for leasing and short-term credit line, and has placed a bond.
Cash flow and liquidity. The Company’s indicators in the forecast period will heavily depend on carrying out planned capital investments and the success of launching the new meat processing business. The weighted FCF margin for 2019–2024 is expected at -4.9%, which is mainly due to the projected negative indicator in 2022 followed by a return to positive FCF in 2023. The Company’s debt repayment schedule is rather balanced and does not include any peaks in the medium term, while financing of the investment program and an increase of working capital are planned thanks to a bond issue in 2022.
key assessments
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Commissioning of the processing plant in 2023;
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Investment program carried out in line with the Company’s plans;
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No dividend payments.
potential outlook or rating change factors
The Developing outlook assumes a variety of trends: the rating may stay unchanged, be upgraded or downgraded.
A positive rating action may be prompted by:
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Ratio of adjusted total debt to FFO before fixed payments falling below 2.0x;
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FFO before fixed payments to fixed payments exceeding 5.0x;
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FCF margin turning positive;
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Successful launch of the processing plant.
A negative rating action may be prompted by:
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FFO before fixed payments to fixed payments falling below 1.0x;
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FFO margin before interest and taxes declining below 2%;
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Ratio of adjusted total debt to FFO before fixed payments exceeding 5.0x and FFO before fixed payments to fixed payments falling below 2.5x.
rating components
Standalone creditworthiness assessment (SCA): b.
Support: none.
issue ratings
No outstanding issues have been rated.
regulatory disclosure
The credit rating has been assigned to LLC “Center-reserve” under the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Non-Financial Corporations under the National Scale for the Russian Federation and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities.
The credit rating of LLC “Center-reserve” was published by ACRA for the first time on December 15, 2021. The credit rating and its outlook are expected to be revised within one year following the publication date of this press release.
The credit rating was assigned based on data provided by LLC “Center-reserve”, information from publicly available sources, and ACRA’s own databases. The credit rating is solicited, and LLC “Center-reserve” participated in its assignment.
In assigning the credit rating, ACRA used only information, the quality and reliability of which were, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.
ACRA provided no additional services to LLC “Center-reserve”. No conflicts of interest were discovered in the course of credit rating assignment.
