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Rating action

Scope Ratings GmbH (Scope) has today affirmed the issuer rating of BBB-/Stable on Norwegian agricultural company Felleskjøpet Agri SA. Scope has also affirmed the senior unsecured debt rating of BBB-.

Rating rationale

Felleskjøpet’s credit rating is supported by its leading position in the grain market and its strong and dominant market share in fertiliser, seeds and feed concentrate, and the overall relatively stable and diversified business model supported by a cooperative company structure. The good grain harvest in 2022 required the company to significantly increase net working capital temporarily, as it stores grain for sale in 2023. Overall, Scope expects the increased sale of those volumes at regulated prices in addition to a record-high agriculture settlement payment to farmers in 2023 to benefit Felleskjøpet’s credit metrics in the short to medium term.

Felleskjøpet’s business risk profile (assessed at BBB-) is supported by protective measures for the Norwegian agricultural sector, including tariffs on selected foreign input factors. The rating benefits from the company’s leading position in the Norwegian grain market, where it purchases more than 50% of domestic production and serves as the market regulator. Felleskjøpet serves the whole value chain of grain farmers, from fertilisers and seeds to agricultural machinery from John Deere, guaranteeing grain purchases and producing refined products for human or animal consumption. Felleskjøpet’s geographical diversification is limited to Norway (80% of revenues) and Sweden (20%). The geographical concentration results in a relatively strong dependency on the Norwegian agriculture sector and the economic strength of Norway’s farmers, and Scope therefore highlights the risk arising from any changes in the agriculture sector’s structure or regulation. Felleskjøpet has a diverse product offering along the agriculture value chain, reducing the reliance on any single product, and a diverse customer base of 41,000 farmers on the agricultural side in addition to all its retail customers, although there are some large commercial customers. Felleskjøpet’s overall profitability margins are stable but low, with the picture more mixed on the segment level.

The financial risk profile, assessed at BB+, is weaker than the business risk profile. Leverage ratios were somewhat high historically but have gradually decreased. Scope-adjusted leverage was around 3x as of 2020, down from the 2017-19 average of more than 4x, but increased again to levels around 3.5x during 2021 and 2022E due to significant investments and net working capital needs met by increased debt levels.

Going forward, Scope expects increased operating cash flows and stable debt to benefit deleveraging. The rating agency expects a Scope-adjusted leverage of around 3x in the medium term and Scope-adjusted funds from operations/debt ratios of 20%-30%. Interest coverage is expected to remain solid at levels around 5x, with the company being mostly sheltered from the increase in rates by long-term hedges. Liquidity is deemed adequate based on good access to banks and domestic bond markets and short-term debt coverage (including undrawn credit lines) above 200%.

Scope has not made any adjustment for supplementary rating drivers. The implemented leverage target of 2.5x-3.5x in the financial policy is supportive. With respect to ownership, governance and structure, some of the cooperative ownership elements were considered as positive factors for the business risk profile.

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s expectation that Felleskjøpet will continue to hold leading market positions and be important to the overall value chain of farmers. It also assumes no change to the cooperative structure as well as to the regulatory conditions and protective measures applicable to the Norwegian agricultural sector. Financially, Scope expects a stable operating performance to result in a Scope-adjusted leverage of around 3x.

A positive rating action is possible if growth remains high and margins improve, especially in Nordic retail, resulting in increased group profitability and free operating cash flow generation and thereby a Scope-adjusted leverage sustained below 2.5x.

A negative rating action is possible if the business risk profile deteriorated through weaker market conditions and/or an unfavourable change in regulations. Increased costs and/or investment that result in a Scope-adjusted leverage sustained above 3.5x could also lead to a downgrade.

Long-term debt ratings

The senior unsecured debt rating is affirmed in line with the issuer rating. Felleskjøpet Agri SA is also the bond-issuing entity.

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, (General Corporate Rating Methodology, 15 July 2022; Retail and Wholesale Rating Methodology, 27 April 2022; Consumer Products Rating Methodology, 4 November 2022), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlook 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-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. 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-governance/definitions-and-scales. 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://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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: Thomas Faeh, Executive Director
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 25 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
© 2023 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.