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Rating action

Scope Ratings GmbH (Scope) has assigned an issuer rating of A-/Stable to Norwegian consumer product company Orkla ASA. Scope has also assigned a senior unsecured debt rating of A- and a short-term rating of S-1.

Rating rationale

Orkla’s business risk profile benefits from the company’s strong positions in its main markets. 80% of revenues are generated by branded consumer products, with brands holding number one or number two positions in their home markets. This partly mitigates Orkla’s less diversified geographical diversification (which is, however, improving), as the company is mainly present in the Nordics (approx. 70% of revenue). Diversification in terms of product offering, suppliers and distribution networks is good. Orkla has over 300 brands, of which some are targeted for a more international focus and expansion. Although Scope views positively the low volatility in Orkla’s profitability, the company is slightly lagging some of its larger international peers in terms of EBITDA margins.

Scope assesses the company’s financial risk profile as stronger than its business risk profile. This is based on a conservative capital structure with Scope-adjusted debt/EBITDA well below 2x in recent years. Furthermore, Orkla has also reported very solid free operating cash flow/Scope-adjusted debt ratios and shown strong financial flexibility. Although leverage has increased in 2021, due to recent acquisitions, Scope expects it to remain at 1-2x in the short to medium term.

Scope’s financial forecast assumes that Orkla will be slightly more growth focused (as expressed at its Capital Markets Day in November 2021) and maintain an active M&A ambition within its pre-defined growth areas. As a result, Scope’s base case incorporates a certain amount of expansionary investment but no divestments, while noting that Orkla may be open to this.

Liquidity is deemed adequate based on good access to banks and domestic bond markets. As of Q3 2021, Orkla had NOK 9.7bn in cash and undrawn credit lines, well above reported short-term debt of NOK 4.6bn. Although the company has a rather high portion of short-term debt at the moment, it is more than sufficiently covered by undrawn committed back-up lines.

Scope has made no adjustment for supplementary rating drivers. Orkla’s financial policy is assessed as conservative and prudent, with well-established financial targets that mitigate potential growth risks. Ownership, structure and governance are credit neutral, resulting in no supplementary rating adjustments.

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s expectation that Orkla will continue to hold leading positions in its key markets and maintain a good product diversification mix offering of non-durable consumer goods. The Stable Outlook also assumes higher expansionary investment in the medium term (compared to Orkla’s recent history up until 2020), but a continuation of strong leverage and cash flow metrics, exemplified by a stable operating performance, resulting in Scope-adjusted leverage averaging 1-2x over time.

A positive rating action is currently seen as remote due to the company’s focus on expansion, as well as its M&A ambitions. This is assumed to be more important to management than steering towards a very conservative capital structure, that will significantly improve the financial risk profile. A positive rating action could however be warranted in the longer run if the company introduce even more conservative financial targets in the future.

A negative rating action is possible if Orkla’s business risk profile deteriorates through weaker market shares and/or falling profitability margins. Additionally, an increased M&A and growth focus above Scope’s expectations, resulting in sustained Scope-adjusted leverage above 2x could also lead to a downgrade.

Long-term and short-term debt ratings

The senior unsecured debt rating is in line with the issuer rating. Orkla ASA is also the bond-issuing entity. Bond documentation includes a negative pledge, pari passu and no financial covenants.

The short-term rating of S-1 is backed by adequate liquidity, strong banking relationships and the company’s well-established capital market standing.

Stress testing & cash flow analysis
No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.

Methodology
The methodologies used for these Credit Ratings and/or Outlook, (Corporate Rating Methodology, 6 July 2021; Rating Methodology: Consumer Products, 30 September 2021), are available on https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity and Scope Ratings' internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data. Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlook and the principal grounds on which the Credit Ratings and/or Outlook are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlook are UK-endorsed.
Lead analyst: Henrik Blymke, Managing Director
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 11 January 2022.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use/exclusion of liability
© 2022 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Analysis GmbH, Scope Investor Services GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.