Fitch: Ukrainian Tax Code Changes Neutral for Kernel's & MHP's Ratings


Fitch Ratings-Moscow/London-14 January 2016: Fitch Ratings says that the recently adopted changes to the Ukrainian tax regime for agricultural producers are neutral for Kernel Holding S.A.'s and MHP S.A.'s 'CCC' ratings. The finally approved amendments to the tax code were more favourable for the companies than Fitch assumed in its conservative forecasts in September 2015, but the ratings are unchanged as they are constrained by Ukraine's Country Ceiling of 'CCC'. On 24 December 2015, Ukraine's government approved a number of amendments to the tax code, including the taxation regime for agricultural producers, effective from 2016. The main changes are the partial cancellation of previous preferential treatments under the special VAT regime for agricultural companies, the reinstatement of VAT refunds on grain export and an increase in fixed agricultural tax. The changes affect MHP and Kernel differently. As a result of the new legislation, MHP's poultry and grain divisions will retain only 50% and 15% of VAT, respectively, versus 100% previously. However, the company will benefit from the reinstatement of VAT refunds on grain exports. Nevertheless, this will be insufficient to offset the contraction in income from the special VAT regime (2014: 18% of EBITDA) and the overall impact on MHP's cash flows will be negative. For Kernel, the new tax regime will be positive as the benefits from VAT refunds on grain export will more than compensate for lower VAT retention in its farming segment (15% vs. 100% previously). The approved changes in the tax regime are more favourable for both companies than the assumptions factored into Fitch's previous projections. In its forecasts, Fitch conservatively assumed full cancellation of the special VAT regime for agricultural producers from 2016 without subsequent reinstatement of VAT refunds on grain exports. We now estimate that compared with our original forecasts, which projected that MHP's funds from operations adjusted leverage would peak at 3.8x in 2016-2017 and Kernel's would remain at 3.0x over the medium term, the new tax regime will enable MHP's and Kernel's 2016 operating cash flows to improve by around USD40m-USD50m and their leverage to decrease by around 0.3x-0.5x. Contact: Tatiana Bobrovskaya Associate Director +7 495 956 5569 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Anna Zhdanova Analyst +7 495 956 9901 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: Additional information is available on ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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