ACRA has affirmed the credit rating of NC Food Contract Corporation JSC (hereinafter, the Company) due to the Company maintaining its credit metrics within the ranges set for this rating category. In 2021, the Company expectedly increased its borrowings in order to boost the size of the grain fund to more than 1.6 mln tons. The volume of operations to buy and sell grain in order to stabilize prices in Kazakhstan’s internal market should reach around 0.7 mln tons in 2022 and 1.3 mln tons in 2023.
The Company’s rating under the international scale is based on the Company’s 'b' standalone creditworthiness assessment (SCA), the medium assessment of support for the Company from the Republic of Kazakhstan (ACRA rating under the international scale — BBB+, outlook Stable; hereinafter, Kazakhstan), and medium dependence on similar risk factors. Considering the combination of these factors, the Company’s rating has been assigned at the SCA plus two notches, which is equal to BB-.
The Company holds the status of a national company of Kazakhstan. Its main function is to ensure the food security of the country through quantitative and qualitative preservation of the food grain reserve and through contributing to the stabilization of the domestic grain market and the development of exports. In accordance with Decree of the Government of the Republic of Kazakhstan dated May 27, 2020, 100% of the Company’s stocks were transferred to state ownership.
key assessment factors
The business profile is weak compared to global companies. The Company is solely a grain trader. Its food fund consists mainly of wheat grain. The annual volume of sales of grain in 2022 was around 0.7 mln tons, and in 2023, the sales volume is expected to reach 1.3 mln tons. The bulk of sales takes place in Kazakhstan’s domestic market. The Company also exports grain to China, Azerbaijan, Turkmenistan, Tajikistan, Georgia, and Uzbekistan. However, compared to global traders, the extent of the Company’s operations is rather local in nature. In ACRA’s opinion, the Company’s primary focus on trading grain is a limiting factor in the assessment of product diversification and the share of products with high value added. When assessing vertical integration, ACRA took into account the existence of the Company’s own grain elevators, as well as its long-term contracts with approximately 100 grain elevators that store grain throughout Kazakhstan. The Company’s own grain terminal (Ak Biday-Terminal JSC), which is located on the east coast of the Caspian Sea at Aktau Sea Port, and Baku Grain Terminal LLC owned by the Company on an equal footing with a partner, is also a positive factor in the assessment of the Company’s business profile.
The Company’s operations are very narrow by global standards, and its share in the global grain market is very small. These aspects determine the very low assessment of the “market share” sub-factor.
The assessment of corporate governance factors corresponds, in ACRA's opinion, to the average value for the international corporate segment.
The financial risk profile assessment is low. The Company’s business size is small in terms of annual revenue in US dollars (less than USD 1 bln). In 2021, the Company's EBIT was high (about 13%). The Agency expects this indicator to reach 20% in 2022 amid growing wheat prices. In order to finance grain purchases, the Company intends to increase its loan portfolio using various sources, including issuing bonds in the Russian and domestic markets. The Company’s total debt exceeded KZT 79 bln as of the end of 2021; ACRA expects it to exceed KZT 200 bln by the end of 2022. The ratio of total debt to FFO before net interest amounted to 14.6x in 2021. According to the Agency, this indicates a very high level of leverage. ACRA expects this figure to decline to 12.7x in 2022 as operating profit increases due to business volume growth and higher wheat prices.
The debt service ratio (the ratio of FFO before net interest to interest) amounted to 1.7x in 2021, which is low. ACRA expects this ratio to decrease to 1.1x in 2022 due to the growing loan portfolio and interest rates. Should the Company fails to achieve the planned sales volumes amid persistently high interest rates, the debt service ratio may fall below 1.0x, which may serve the ground for revising the rating.
ACRA estimates that the Company’s liquidity is at a high level due to the presence of a significant internal cash position, as well as the possibility of attracting additional liquidity under new loan agreements that are in the final stage of approval.
Medium assessment of support from the state. Since 2007, the Company has held the status of being a national company of Kazakhstan and implements the state policy in the field of food security and grain market stabilization. The Company’s mission as the state operator in the grain market was established at its creation in 1995. According to the Decree of the Government of the Republic of Kazakhstan, dated March 28, 2011, and the trust management agreement, the Company was the sole agent in managing non-reduced state grain reserves. The Company is responsible for the formation, storage, refreshment, movement, and use of state grain resources. In accordance with the instructions of the President of the Republic of Kazakhstan, the Company's minimum wheat reserves were approved at 500,000 tons. The Company controls these reserves and receives all the benefits from managing the grain.
Regarding the degree of state influence on the Company’s activities, ACRA notes the presence of state representatives on the Company’s Board of Directors, as well as the financial support that the state has provided to the Company since its establishment. However, the level of this support has changed over time. With the transition of the Company to direct state control represented by the Ministry of Agriculture of the Republic of Kazakhstan, the degree of state influence has been increasing. In 2020, the state provided an additional KZT 24.5 bln in capitalization to the Company (for the program of forward purchase of agricultural crops). By the end of 2022, the Company will receive KZT 20 bln more. The Company will be compensated for expenses on storing the state grain reserve and, starting from 2023, the state will provide a KZT 70 bln loan for increasing the grain turnover.
KEY ASSUMPTIONS
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Grain reserve managed by the Company at about 1.6 mln tons in the forecast period;
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Annual sales and grain purchases increasing to approximately 1.3 mln tons in 2022–2024;
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Dividend payments at 70% of net profits.
POTENTIAL OUTLOOK OR RATING CHANGE FACTORS
The Stable outlook assumes that the rating will highly likely stay unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
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Leverage (the ratio of total debt to FFO before net interest) falling below 7.0x and FFO before net interest to interest increasing above 3.0x;
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Increased financial influence of the state on the Company's operations.
A negative rating action may be prompted by:
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EBIT margin falling below 10% and a decrease in the liquidity ratio below 1.5x;
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Leverage (the ratio of total debt to FFO before net interest) remaining above 7.0x with a decrease in FFO before net interest to interest below 1.0x.
RATING COMPONENTS
SCA: b.
Support: SCA plus two notches.
ISSUE RATINGS
Credit rating rationale. The Company is the issuer of the series 01 bond issue (RU000A102BF7). The issue is the Company’s senior unsecured debt. Due to the absence of either structural or contractual subordination of the issue, ACRA regards it as pari passu with other existing and future unsecured and unsubordinated debt obligations of the Company. In accordance with ACRA’s methodology, the recovery rate for senior unsecured debt belongs to category I. In order to assign a credit rating to this issue on the national scale for the Russian Federation, ACRA applied the Methodology for Mapping Credit Ratings Assigned on ACRA’s International Scale to Credit Ratings Assigned on ACRA’s National Scale for the Russian Federation. In accordance with the above methodology, the credit rating of the bond issue is set at BBB(RU).
Uncertificated non-convertible coupon bond issued by NC Food Contract Corporation JSC, subject to centralized title registration, series 01 (RU000A102BF7), maturity date: March 26, 2026, issue volume: RUB 2.45 bln — BBB(RU).
REGULATORY DISCLOSURE
The credit rating of NC Food Contract Corporation JSC has been assigned under the international scale based on the Methodology for Assigning Credit Ratings to Non-financial Corporations under the International Scale, the Methodology for Analyzing Rated Entities Associated with a State or a Group, and Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities. The credit rating of the series 01 bond issue (RU000A102BF7) of NC Food Contract Corporation JSC has been assigned on the national scale for the Russian Federation based on the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments on the National Scale for the Russian Federation, the Methodology for Mapping Credit Ratings Assigned on ACRA’s International Scale to Credit Ratings Assigned on ACRA’s 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 ratings of NC Food Contract Corporation JSC and the series 01 bond issue (RU000A102BF7) of NC Food Contract Corporation JSC were published by ACRA for the first time on July 6, 2020 and April 2, 2021, respectively. The credit rating of NC Food Contract Corporation JSC and its outlook and the credit rating of the series 01 bond issue (RU000A102BF7) of NC Food Contract Corporation JSC 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 NC Food Contract Corporation JSC, information from publicly available sources, and ACRA’s own databases. The rating analysis was performed using the IFRS consolidated statements of NC Food Contract Corporation JSC. The credit ratings are solicited, and NC Food Contract Corporation JSC participated in their assignment.
In assigning the credit ratings, ACRA used only information, the quality and reliability of which was, in ACRA's opinion, appropriate and sufficient to apply the methodologies.
ACRA provided no additional services to NC Food Contract Corporation JSC. No conflicts of interest were identified in the course of credit rating assignment.
