The credit rating of JSC Avangard-Agro (hereinafter, Avangard-Agro, or the Company) is based on its standalone creditworthiness assessment (SCA) at bbb, which includes event risk. This risk stems from a possible deterioration in the financial standing of other related companies controlled by the controlling shareholder, which may have negative consequences for the Company.
The SCA of Avangard-Agro is based on the high assessment of geographic diversification, medium assessment of the business profile, taking into account the significant share of products with high added value, and the medium assessments of product diversification and vertical integration. The SCA is supported by Avangard-Agro’s medium financial risk profile, which in turn stems from very high profitability, medium leverage, high interest payment coverage, and medium assessments of the Company’s size and liquidity. The weak free cash flow (FCF) margin continues to limit the Company’s financial risk profile.
The outlook has been changed from Stable to Negative due to the continued negative FCF on the back of substantial dividend payments that exceed net profit. In the future, this may lead to a lower assessment of the Company’s cash flow.
Avangard-Agro is an agroholding focused on cereals and technical crops in the northern and central areas of Russia’s Central Black Earth Region. The Company manages 450,000 hectares of farmland; its agricultural machinery fleet includes 500 combine harvesters, 1,230 tractors, and 1,700 vehicles.
KEY ASSESSMENT FACTORS
High geographic diversification assessment and medium business profile assessment. The Company has the necessary production infrastructure for growing the main types of agricultural crops, as well as its own facilities for the production of malt (obtained from processing its own barley and wheat). The product portfolio of crops is well diversified, including wheat and barley, which account for most of the harvest, sugar beet, sunflower, and corn. Geographic diversification takes into account the well-developed logistics chain for selling the Company’s products, which include a high share of exports (around 47% in 2023). Avangard-Agro’s main exports in 2023 were malt, wheat, and corn. The Company grows its crops in the Voronezh, Oryol, Kursk, Belgorod, Lipetsk, and Tula Regions, which have moderately favorable climate conditions for agriculture, and also allow the northern and southern transportation and logistics corridors to be used for exporting products.
The low assessment of market position is based on the high fragmentation of the grain market and Avangard-Agro’s complete dependence on the prices formed in the market at the end of the year. In 2023, the Company’s total grain harvest was 1 mln tons, which is less than 1% of the national figure (139 mln tons). The Agency positively views the fact that high-margin malt accounts for more than half of the Company’s revenues.
The medium assessment of corporate governance is a reflection of the concentration of shareholder risks on the sole owner, who plays an active role in the strategic and operational management of the Company, as well as the presence of operations with related parties represented by “AVANGARD” JSB (ACRA rating BB+(RU), outlook Stable). There are no formalized corporate procedures (including a dividend policy and a risk management policy).
Very high profitability and medium size of the Company. In 2023, Avangard-Agro’s revenues amounted to RUB 28.2 bln (+10.3% vs. 2022) amid a recovery of export revenues. Weighted average FFO before net interest payments and taxes for 2020 to 2025 is RUB 12 bln. ACRA notes the continued very high business profitability due to high yields, as well as the high profitability of malt, the share of which in the revenue structure is growing. The weighted average ratio of FFO before interest payments and taxes for 2021–2026 is 43%.
Medium leverage and high interest payment coverage. As of the end of 2023, the ratio of the Company’s total debt to FFO before net interest payments was 2.9x compared to 2.4x in 2022. Coverage of interest payments (FFO before net interest payments to interest payments) was 5.9x in 2023 vs. 8.3x a year earlier. The decrease in the indicator was caused by an increase in interest rates on the portfolio. The Agency notes that debt servicing remains at a high level. ACRA expects a gradual decline in debt load in the forecast period as debt portfolio repayments are made. The debt portfolio is made up of loans from two major Russian banks, three bond issues, and borrowings from related parties. As of March 31, 2024, around 19% of debt obligations were denominated in foreign currencies.
The medium liquidity position stems from the significant share of liabilities in the Company’s loan portfolio (around 70% as of March 31, 2024). At the same time, the Company has access to both internal sources of liquidity and significant amounts of bank credit limits for debt refinancing.
Negative FCF. The FCF margin remained negative in 2023 and continued its downward trend, reaching -24% (vs. -20% in 2020) as a result of payment of substantial dividends. Continuation of dividend payments leading to negative FCF may result in a lower assessment of the Company’s cash flow. The ratio of capital expenditures to revenues fell to 5% in 2023 vs. 6% a year earlier. ACRA expects this indicator to remain at 5% in the forecast period of 2024–2026.
KEY ASSUMPTIONS
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Stable area of farmland of around 450,000 hectares;
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Capital investments at RUB 1.5 bln a year;
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Annual dividend payments at no more than 75% of net profits.
potential outlook or rating change factors
The Negative outlook assumes that the rating will highly likely be downgraded within the 12 to 18-month horizon.
A positive rating action may be prompted by:
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Further increase in the share of malt in the structure of production;
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Actual FCF margin exceeding 10%;
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Ratio of total debt to FFO before net interest payments declining below 1.0x and FFO before net interest payments to interest payments exceeding 8.0x.
A negative rating action may be prompted by:
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Continued negative FCF;
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Ratio of total debt to FFO before net interest payments exceeding 3.5x;
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Ratio of FFO before net interest payments to interest payments falling below 5.0x;
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FFO margin before interest payments and taxes declining below 15%.
rating components
SCA: bbb.
Support: none.
issue ratings
JSC Avangard-Agro, BO-001P-01 series (RU000A0ZYC31), maturity date: September 23, 2027, issue volume: RUB 3 bln — BBB(RU).
JSC Avangard-Agro, BO-001P-02 series (RU000A0ZYH02), maturity date: November 16, 2027, issue volume: RUB 3 bln — BBB(RU).
Rationale. The issues listed above are senior unsecured debt instruments of Avangard-Agro. Due to the absence of either structural or contractual subordination of the issues, ACRA regards them as equal to other existing and future unsecured and unsubordinated debt obligations of the Company in terms of priority. According to ACRA’s methodology, the unsecured debt repayment level corresponds to the second category as per the detailed approach. Therefore, the credit ratings of the issues are equivalent to that of Avangard-Agro.
regulatory disclosure
The credit ratings have been assigned to JSC Avangard-Agro and the bond issues (RU000A0ZYC31, RU000A0ZYH02) of JSC Avangard-Agro 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 Methodology for Assigning Credit Ratings to Financial Instruments under the National Scale for the Russian Federation was also applied to assign the credit ratings to the above issues.
The credit ratings of JSC Avangard-Agro and the bond issues (RU000A0ZYC31, RU000A0ZYH02) of JSC Avangard-Agro were published by ACRA for the first time on July 31, 2017, October 9, 2017, and November 28, 2017, respectively. The credit rating of JSC Avangard-Agro and its outlook and the credit ratings of the bond issues are expected to be revised within one year following the publication date of this press release.
The credit ratings were assigned based on data provided by JSC Avangard-Agro, information from publicly available sources, and ACRA’s own databases. The credit ratings are solicited and JSC Avangard-Agro participated in their assignment.
In assigning the credit ratings, 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 JSC Avangard-Agro. No conflicts of interest were discovered in the course of credit rating assignment.
