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Research Update: Ukraine-Based Kernel Holding Downgraded To 'SD' On Postponement Of Bank Loan Repayments; Issue Ratings On Notes To 'CC'

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Research Update: Ukraine-Based Kernel Holding Downgraded To 'SD' On Postponement Of Bank Loan Repayments; Issue Ratings On Notes To 'CC'

Rating Action Overview

  • Ukraine-based sunflower and grains exporter, Kernel Holding S.A., has experienced severe disruption because Black Sea port closures are restricting the movement of cargo out of the country. The company's export capacity is further restricted by a special licensing system introduced to ensure sufficiency of domestic supply.
  • We understand that Kernel is negotiating with bank lenders on a bilateral basis to postpone payments under US$866 million of short-term bank borrowings, including unsecured bank lines and offshore bilateral financing facility, due between March-September 2022 to the end of September.
  • We lowered to 'SD' (selective default) from 'B-' our issuer credit rating on Kernel Holding, and to 'CC' from 'B-' our issue-level ratings on its outstanding senior unsecured notes.
  • The 'CC' issue-level rating on the notes indicates willingness and ability to pay the upcoming coupons due in April, but the group's ability to continue to service these obligations over the next 12 months is highly uncertain, in our view.
  • We will re-evaluate our ratings on Kernel when we no longer believe there is a high likelihood of a payment default, and we have capacity to evaluate the company's business and financial prospects in a satisfactory manner.

Rating Action Rationale

The rating action reflects Kernel's request to postpone repayment of $866 million short-term bank borrowings which are due March-September 2022 to the end of September 2022.  These bank loans comprise inventory-linked working capital facilities, other unsecured local bank loans, and an offshore facility. We understand the group is confident it can secure the support of its lenders. We consider this to be a selective default under our methodology, as an S&P Global Ratings' issuer credit rating is a forward-looking opinion that focuses on the obligor's capacity and willingness to meet all its financial commitments as they come due.

We understand that Kernel has enough cash and is willing to make the $19.875 million coupon payments due in April under its outstanding senior unsecured notes.

The notes comprise $300 million 6.5% fixed-rate coupon notes due October 2024, and $300 million 6.75% fixed-rate coupon notes due October 2027. Beyond April 2022, we consider it highly unlikely that Kernel can or will continue to service its debt obligations, unless business and cash flow prospects improve substantially in Ukraine. We would lower to 'D' (default) our issue rating on the senior notes outstanding if the company does not make the payments in full when due.

Kernel's credit profile has deteriorated significantly because of the ongoing military conflict between Russia and Ukraine.  Kernel's export capacity has been hard hit by port closures in Ukraine because this is the traditional route for its agricultural exports. To protect its financial position, when the conflict started the company invoked force majeure clauses under export contracts that use Grain and Feed Trade Association (GAFTA) rules. This minimized the risk of claims for nonperformance under its sales contracts. Kernel recently received its first license to export grains and sunflower oil under this system. It is looking at alternative export trade routes, for example, using its own railway wagons and cargo cars or renting third-party transportation so that it can transport goods across Ukraine's border with Poland. Like other domestic companies, Kernel is also engaged in humanitarian aid in the country.

We will re-evaluate our ratings on Kernel when we no longer consider there is a high likelihood of a payment default, and we have capacity to evaluate the company's business and financial prospects in a satisfactory manner.

At our next rating review, we would need to receive a satisfactory level of information to be able to re-evaluate the company's business and financial prospects under the prevailing debt terms and rapidly changing operating business environment.

Company Description

Kernel Holding is the world's largest sunflower oilseeds processor and exporter, and Ukraine's largest grains exporter.

Related Criteria

Related Research

Ratings List

Downgraded; Outlook Action
To From

Kernel Holding S.A.

Issuer Credit Rating SD/--/-- B-/Watch Neg/--
Senior Unsecured CC B-/Watch Neg

Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. A description of each of S&P Global Ratings' rating categories is contained in "S&P Global Ratings Definitions" at https://www.standardandpoors.com/en_US/web/guest/article/-/view/sourceId/504352 Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column. Alternatively, call one of the following S&P Global Ratings numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; or Stockholm (46) 8-440-5914

Analytical Group Contact:Corporate and IFR EMEA;
RatingsCorpIFREMEA@spglobal.com

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