Fitch downgrades Kernel to default risk level CC

An American credit rating agency and is one of the "Big Three credit rating agencies", Fitch, has downgraded Kernel Holding S.A.'s Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) to 'CC' from 'CCC'.

Fitch has also downgraded the company's USD 300 mln senior unsecured notes due 2024 and USD 300 mln senior unsecured notes due 2027 to 'C'/RR6/0% from 'CCC'/RR4/50%.

"The downgrades reflect the difficult operating conditions Kernel has been facing since the beginning of the Russian invasion, the severe disruption in export activities, the potentially weakening liquidity profile and our understanding that it has submitted waiver requests connected to delaying repayment of its bank facilities," the report reads.

The 'CC' IDR indicates that default of some kind appears probable, despite management's efforts to inject liquidity via the divestment of certain assets to the main shareholder. Failure to obtain lenders' consent to delay payments would likely lead to a downgrade, the agency comments.

To de-risk the business and improve liquidity, on 26 April 2022 Kernel entered in a USD 210 mln agreement to sell 134,000 ha of land with related infrastructure, machinery and working capital. Fitch believes the disposal will take time and is subject to some execution risk since completion of the transaction is also conditional on filing at the registration office, which has been gradually reopening after a temporary closure due to martial law. USD 20 mln of the selling price was received in advance but the remaining amount will be received 90 days after completion.

Fitch expects proceeds to be used for repayment of outstanding debt or investments.

"An upgrade is unlikely at this point. The resumption of export activities, an improved liquidity position and relaxation of the restrictions on cross-border FX payments would be positive for the rating," the agency adds.

As of June 19, Kernel market cap totalled USD 377 mln having decreased by 23.2%. Before the war, the company's market capitalization amounted to USD 1134 mln.

In September 2020, Fitch affirmed Kernel at 'BB-'.