DBRS Comments on AGT in Light of Political Situation in Turkey

DBRS Limited (DBRS) has today commented on the implications of recently heightened political risk in the Republic of Turkey (Turkey) on AGT Food and Ingredients Inc.’s (AGT or the Company) credit risk profile. DBRS notes that it downgraded Turkey’s Long-Term Foreign Currency – Issuer Rating on July 21, 2016, to BB (high) from BBB (low) (see separate press release). The downgrade reflected a deterioration in the rule of law and rising geopolitical tensions in the context of Turkey’s large external financing needs. Furthermore, DBRS noted that the failed coup attempt and its fallout could divert political attention from the much-needed structural reform agenda, which is important to boost national savings and reduce external imbalances. The trends on the ratings remain Negative, reflecting the view that risks remain skewed to the downside.

The degree of political risk in Turkey is a consideration in DBRS’s view of AGT’s overall credit risk. The importance of AGT’s assets in Turkey (i.e., approximately 20% of total property, plant and equipment) is displayed by its use as a key distribution hub for the Company’s global sales into the region. Furthermore, AGT’s recovery rating of RR3 is primarily based on recovery on assets in Turkey, including significantly discounted values on its readily marketable commodity inventories, property and equipment (see rating report published on April 26, 2016).

The impact on AGT’s operations has thus far been limited to a brief six-hour shutdown of the Port of Mersin during the time of the failed coup, the location of AGT’s key assets. Since that time, no further disruptions to port operations have been noted. DBRS also notes that AGT does not rely on any credit from the Turkish banking system because it centralizes its treasury activity in North America. As such, the Company’s exposure to any possible credit tightening in Turkey is therefore limited to the potential impact on smaller domestic customers. In addition, the impact of foreign exchange changes has not been extreme to AGT as it generates little of its revenue in Turkish lira, which declined by approximately 5% in the days following the failed coup, a portion of which has since been recovered.

Despite the modest increase in risk in AGT’s credit risk profile, DBRS believes that AGT’s Issuer Rating and Senior Secured High-Yield Notes rating remain well placed at B (high) and BB (low), respectively. DBRS will, however, continue to monitor the situation as any further deterioration in the rule of law and any increase in geopolitical tensions could have a negative impact on the Company’s ratings, including possible diminishing recovery prospects on Turkish assets, delays to positive rating actions or, in the case of extreme deterioration, possible negative rating actions.

RATING DRIVERS

AGT’s ratings continue to be supported by growth in its less-cyclical and higher-margin food ingredients and packaged foods segment as well as its solid position in staple foods (benefiting from industry trends and demographics) and diversification in terms of geography, suppliers and customers. The ratings also reflect volatility in input cost sensitivity to weather, competition, risks associated with growth and the capital-intensive nature of the legacy business.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodologies are Rating Companies in the Consumer Products Industry, DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers and DBRS Criteria: Guarantees and Other Forms of Support, which can be found on our website under Methodologies.

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