International rating agency Fitch Ratings has placed Avangard in the “negative” list as company’s long terms issuer default ratings are currently at “B” level. This rating action follows the announcement on the transfer of Oleg Bakhmatyuk shares in Avangardco in the amount of 77.5% to Ukrlandfarming PLC, which has no rating and is under 100% control of O. Bakhmatyuk, said Fitch.

Fitch recognizes the potential benefits of combining the two agricultural areas under the control of Ukrlandfarming. However, the agency remains concerned about the ultimate goal of transferring ownership of another entity controlled by the same shareholder, as well as on the mechanisms of transfer pricing, which will be set in grain purchases by Avangardco from Ukrlandfarming.

The company claims that the deal will not likely to trigger a change of control provisions in the documentation for Eurobonds of Avangardco, as O. Bakhmatyuk remains the beneficial owner, controlling 77.5% stake Avangardco.

Since the share of grain costs accounts for 75% of the egg production, Fitch believes that Avangard will receive the coarse grains from Ukrlandfarming, to provide the necessary amount of grain for livestock feed. At the same time, today it is not clear whether such purchases are made at market prices, and whether the company provided loans to Ukrlandfarming in financial aid. Fitch recognizes the potential economies of scale and opportunities for cross selling. However, the partnership with the company, which is a new controlling shareholder of Avangardco, for the purchase of grain and, possibly, the sale of egg products is seen as a negative change in the short term from previously noted intention of management to reduce dependence on related parties.

The agency also points out that the CEO of "Avangard" Natalia Vasilyuk will be appointed to the Board of Directors of Ukrlandfarming. As already noted, such situation raises questions about corporate governance standards, including the degree of supervision over future transactions with related parties by the Avangardco Board of Directors, as O. Bakhmatyuk continues to exert strong influence on the decision of the board of directors.

Ratings of Avangardco still reflect a narrow range of products and companies are expected to generate negative free cash flow in 2011 and 2012 taking into account large investment plans. The agency said that it intends to make a decision on the status of the Rating Watch "negative" over the next six months, when the agency is clear about the financial situation of Ukrlandfarming, transfer pricing policies within the group and the degree of separation and protection of "Avangard" in the group. It is reported that combined agricultural holding will become the owner of the largest land bank in Ukraine consisting of almost 500 thousand hectares, 65 thousand units of cattle, chicken stock of 24 million chickens. In addition, the company will own 18 meat processing plants, 2 plants for processing leather, 6 seed plants, 6 sugar mills, three elevators with capacity 645 thousand tons of storage, 4 and 110 horizontal grain storage warehouses.

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