Fredriksen Fish Farmer Chokes on Salmon Glut: Corporate Finance

Fredriksen Fish Farmer Chokes on Salmon Glut
Salmon prices are at a six-year low as farmers in Norway and Chile swamp the market to capture demand for the fish, a popular ingredient at sushi chains and whose Omega-3 oils may prevent dementia. Photographer: Chip Chipman/Bloomberg

Billionaire shipping tycoon John Fredriksen’s Marine Harvest ASA, the world’s biggest salmon farmer, is grappling with a supply overhang that is weighing on profit and may trigger a breach of loan covenants.

Marine Harvest’s ability to honor loan conditions is being called into question after third-quarter net income declined 97 percent. The company’s 225 million euros ($310 million) of convertible bonds due 2015 trade at 82 cents on the euro, according to Bloomberg Bond Trader prices. The bond has plummeted from 123 cents at the start of the year, underperforming peers in the UBS Convertible Europe Index, which have declined an average 7.6 percent.

Salmon prices are at a six-year low as farmers in Norway and Chile swamp the market to capture demand for the fish, a popular ingredient at sushi chains and whose Omega-3 oils may prevent dementia. Oslo-based Marine Harvest may need to renegotiate its debt with lenders including DnB NOR ASA, Nordea Bank AB, ABN Amro Bank NV and Rabobank if the slump persists.

“They might need to restructure,” said Ross Porter, a fund manager at Stavanger, Norway-based investment firm Skagen A/S, which exited the company’s shares over the past two months. “Marine Harvest has a lot of debt and they could be in breach of their covenants in a couple of quarters. They will lose money -- most likely it won’t improve next year.”

Terms of the company’s 775 million-euro loan facility limit debt as a ratio of earnings before adjusted interest, tax, depreciation and amortization to 3.5 times until April 2012, and cap it at no more than 3.25 times until April 2014, and no more than 3 times afterwards. Lenders agreed to enlarge the loan from 600 million euros in the fourth quarter.


Leverage may exceed 3.5 times in the third quarter next year, according to Thomas Lorck, an analyst at Arctic Securities in Oslo. Marine Harvest is targeting net debt at an average 5.5 billion kroner ($980 million) in 2011 after its burden rose to 6.14 billion kroner at the end of the third quarter.

“There’s definitely a risk that the company could breach covenants during 2012,” Lorck said. “In this industry, it’s very common to breach covenants in downturns” and banks are likely to grant a waiver, he said.

Marine Harvest plans to cut 2012 capital spending by 600 million kroner to about 400 million kroner by closing some sites and reducing young-salmon stocking in Norway, Canada and Chile, according to Chief Financial Officer Joergen Andersen. It may cut jobs in Canada.

Chilean Surge

Andersen said he’s “comfortable” with the company’s financial covenants while declining to give its current leverage ratio. The company has the support of its banks, whom it meets with regularly, he said.

“If you look at expectations now for next year” on salmon prices “we will be fine,” Andersen said in an interview in Oslo Oct. 27.

Salmon farmers around the world are raising stock that will result in an increase in supplies of as much as 12 percent next year, Marine Harvest figures show, boosted by Chilean fisheries seeking to catch up after an infectious anemia virus ravaged stock this year. Global consumption of the fish has grown 9 percent so far this year, figures from the Norwegian Seafood Export Council show.

The glut has pushed spot prices for the fish down by about 51 percent since April to an average of 20.64 kroner per kilogram in October, the lowest monthly level in at least six years. The price for the past week is 22.42 kroner, according to data compiled by Fish Pool ASA, a clearing house for financial contracts on salmon.

‘Break Even’

Prices are likely to stay low the rest of 2011 and 2012 as global supply is expected to rise 250,000 metric tons in the next 18 months, according to Nordea Markets, which sees prices at 31 kroner per kilogram this year and an average of 24 kroner for next year.

At that level prices “should be enough for Marine Harvest to break even,” said Dag Sletmo, an analyst at Oslo investment bank ABG Sundal Collier. Any lower will “raise fears of financial distress,” he said.

“2012 seems challenging and supply for the next 1 1/2 years is already swimming in the sea,” Sletmo said.

Demand for salmon will rise once the decline in spot prices trickles through to consumer markets, Marine Harvest Chief Executive Officer Alf-Helge Aarskog said in an interview in Santiago Nov. 9. “There is a time lag there,” he said.

2013 Recovery

ABG Sundal expects the salmon market to recover in 2013, and upgraded its recommendation on the stock to “trading buy” from “hold” on Nov. 9. Over-supply is “well understood by investors,” Sletmo said.

Fish is the third-largest Norwegian export product after oil and gas and metal, and accounts for 5.7 percent of Norway’s export value, according to Statistics Norway. More than 5,000 work in fish farming, where salmon accounts for 90 percent of total sales. The industry accounts for 0.5 percent of Norway’s gross domestic product.

Fredriksen, the richest person in Norway this year, holds about 21 percent of Marine Harvest shares through Geveran Trading Co. The 67-year old has amassed a fortune of 60 billion kroner buying supertankers and oil rigs, according to an annual list by the country’s Kapital magazine. He is also the largest shareholder in Seadrill Ltd., an offshore oil rig company, oil-tanker company Frontline Ltd.

Marine Harvest’s euro-denominated convertible bonds can be handed over for equity when the company’s shares rise to 65 euro cents based on a foreign exchange rate of 8.038 kroner to the euro. The shares, which rose l.6 percent today to 2.64 kroner, are trading at about half the conversion price.

The company raised two credit lines in the first half of the year in addition to the 775 million-euro loan facility which expires in January 2015, according to data compiled by Bloomberg. The interest margin wasn’t disclosed.

“They are now doing things to improve their balance sheet, but there are just limited things they can do,” Skagen’s Porter said. “The industry outlook looks weak.”

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