Grieg May Breach Loan Covenants Amid Salmon Glut

Grieg Seafood ASA, a Norwegian salmon farmer, may breach its loan covenants as salmon prices are likely to fall, ABG Sundal Collier Holding ASA said. The bank cut its estimates by 14 percent for the fourth quarter of this year and 7 percent for 2012.

Salmon prices will reach 24 kroner ($4.29) a kilogram by year-end and 25.8 kroner in 2012 amid supply growth, a level that would lead to Grieg breaching a covenant on the ratio of net-interest bearing debt to earnings before interest, taxes, depreciation and amortization, the Oslo-based investment bank said in a report today. The price of fresh salmon in Norway was 27.47 kroner in the week ending Sept. 2, according to data compiled by Statistics Norway.

“We are not in breach for the moment,” Grieg Chief Financial Officer Atle Harald Sandtorv said over the phone from Bergen. “We are working to establish new covenants, which will fit the new price situation better,” he said. Grieg is working with “several” banks to negotiate debt covenants which are linked to equity rather than Ebitda, the executive said.

Grieg will likely breach its debt covenants during 2012 in ABG’s base case scenario, Dag Sletmo, an analyst at ABG, said in the e-mailed note today. As the fish farmer doesn’t disclose the details of its covenants, ABG has based its estimates on the debt agreements of its competitors.

‘Wall of Supply’

“We continue to see downside as the market will be massively oversupplied for the next 18 months,” he wrote. “Such a wall of supply has not been seen since 2000-2001, and will put pressure on salmon prices.” The third quarter this year and the following four “will see double-digit supply growth year-on-year,” Sletmo said.

Chile’s return to the market after an infectious virus outbreak in 2009 will drive growth initially, Sletmo wrote, while Norway will add supplies in the second half of 2012 due to the high smolt release so far this year. The oversupply will see weaker-than-expected earnings for Oslo-listed fish farmers, said Sletmo, who has cut his earnings-per-share estimate for 2012 by 34 percent. Smolts are young salmon.

Most farming companies will have problems with their existing covenants if today’s prices persist for “more than a year,” said Grieg’s Sandtorv. Prices would need to remain below 27 kroner for more than three quarters before Grieg breached its current limits, he said.

Marine Harvest ASA, the world’s largest salmon farmer, “will go clear, but with just a tiny margin of error,” Sletmo said. “If the salmon price drops 1 kroner per kilogram below our estimate, Marine Harvest will also be in breach of its debt covenant in 2012.” ABG has a “sell” rating on both companies.

Marine Harvest declined to comment on covenants or future prices. “However, we comment on our contract portfolio, which is quite strong for the second half of 2011,” spokesman Joergen Christiansen said by e-mail today.

Both Grieg Seafood and Marine Harvest have limitations on their lending facilities based on the ratio of net-interest bearing debt to Ebitda, according to their second-quarter and annual reports.

(Corrects first paragraph of story published Sept. 16 to show decline is for price estimates.)