Fitch affirms EuroChem at 'BB'; Outlook Stable
MOSCOW. Sept 10 (Interfax) -Fitch Ratings has affirmed Russia-based OJSC EuroChem Mineral and Chemical Company's (EuroChem) Long-term Issuer Default Ratings (IDR) at 'BB' with a Stable Outlook, the agency said in a statement.
"The ratings reflect EuroChem's strong product and geographic diversification relative to rated fertiliser peers, its partial vertical integration and its good position on the industry cost-curve. Those strengths underpin its cash flow generation and its capacity to carry out large expansion projects and the recent M&A activity. The ratings also factor in a more aggressive financial profile under our base rating case for 2013-2015, when we assume record investment levels amid continuously weak market conditions. We believe that EuroChem will have some leeway to adjust payments and deliveries on its capex to reflect material pressure on operating cash flows. The base case debt metrics do not however leave any headroom for shareholder distributions. Rating constraints include the higher than average systemic risks associated with the Russian business environment," Fitch said.
"EuroChem's product diversification across nitrogen and phosphate-based nutrients as well as its iron ore sales (co-product of phosphate rock mining) mitigate the inherent cyclicality of its portfolio. The acquisitions of BASF's nitrogen fertiliser assets (now EuroChem Antwerpen) and the K+S nitrogen distribution network (now EuroChem Agro) in 2012 have enhanced its product range and its geographical footprint. The group ranks as Russia's second-largest fertiliser producer and among the top three in Europe. EuroChem is also 75% self-sufficient in phosphate rock and aims to produce up to 25% of its natural gas needs through the ramp up of Severneft-Urengoy (SNU), the oil and gas exploration and production assets it acquired in 2012.
Export prices trended down for all products in H113. The base case assumes a further gradual decline over H213-2015. Nitrogen-based products have been affected by record Chinese urea exports and phosphate-based products are suffering from weak demand from the world's largest buyer, India (rupee effect and revision of state subsidies). The forecasts factor in the reduction in soft commodity prices and assume new capacity additions in the coming years. For EuroChem, this should be partly offset by the increase of domestic fertiliser prices towards netback parity. In 2013, we project low single digit growth as volumes benefit from the full-year contribution of the nitrogen acquisitions.
The base case also assumes a gradual erosion in margins due to the inclusion of the western European assets and inflationary costs in Russia. Gains from EuroChem's ongoing investments in energy efficiency and SNU's integration should mitigate these trends. We have revised the increase in domestic natural gas prices to 8% in 2014 (15% previously).
Our base case assumes that EuroChem has some flexibility to renegotiate payment terms or defer some of its projects if market conditions put a significant strain on its operating cash flows and debt metrics. The group has announced investments of USD5bn between 2013 and 2017, including maintenance capex of around USD750m-USD1bn and USD3.9bn earmarked for its potash projects. These entail the commissioning of two mines in 2017 with ramp up to a combined potash capacity of 4.6mtpa in 2020/21. Up to 1.5mtpa of the initial production will be for internal consumption. The group also plans to build a potash transhipment terminal in Ust-Luga. Other projects include a USD127m phosphate rock open pit mining development in Kazakhstan, with planned capacity of 1mtpa by 2015 and increases in ammonia capacity and efficiency.
The rating case assumes weak market conditions over 2014-2015 and no dividends or share buy-backs. Net funds from operations (FFO) adjusted leverage will increase to 2.5x at end-2013 (high end of the bracket for the rating) and remains around that level over the next two years. Net debt peaks at RUB95bn at end-2013 and reduces marginally thereafter as CFO is applied to the mining effort. EuroChem's debt has more than doubled between 2010 and 2012 to fund acquisitions and share buy-backs. In H113, RUB9.5bn was spent on share buy-backs against CFO of RUB16.4bn and capex of RUB14.6bn. In the absence of recovery in the market and given the large capex programme, we see no headroom for shareholder distributions in 2014-2015 and the Stable Outlook assumes that the group will maintain a conservative stance.
At end-Q213, EuroChem had cash positions of RUB17.2bn and RUB0.7bn in fixed-term deposits against short-term debt of RUB22bn, RUB15bn of which has been refinanced through a new USD1.3bn club facility signed in August. The latter was used to repay the 2011 PXF loan of the same amount which started amortising in 2013, after a two-year grace period. The new facility is unsecured, priced at three-month LIBOR + 1.8% and also benefits from a two-year grace period. The base case assumes that EuroChem will continue to access the debt capital and bank markets to fund its capex and refinancing needs. The group remains constrained by the gross and net debt/EBITDA covenants in its PXF loan and loan participation notes (3.5x and 3.0x).
Shareholder distributions or shareholder-friendly actions detrimental to debt creditors or translating into a sustained increase in FFO-adjusted net leverage above 2.5x could result in a negative rating action. A sharp deterioration in fertiliser prices, demand or cost position leading to an EBITDAR margin sustained below 20% would also be rating negative.
Positive: Fitch considers an upgrade unlikely due to the large investment programme and the shareholders' opportunistic strategy. However, successful completion of one of the potash projects, together with maintenance of a conservative financial profile, may lead to positive rating action," Fitch said.
FULL LIST OF RATING ACTIONS:
OJSC EuroChem Mineral and Chemical Company:
Long-term foreign currency IDR: affirmed at 'BB'; Outlook Stable
Long-term local currency IDR: affirmed at 'BB'; Outlook Stable
National Long-term rating: affirmed at 'AA-(rus)'; Outlook Stable
Foreign currency Short-term IDR: affirmed at 'B';
Local currency senior unsecured rating (domestic bonds): affirmed at 'BB'
National Long-term unsecured rating (domestic bonds): affirmed at 'AA-(rus)'
EuroChem Global Investments Limited:
Foreign currency senior unsecured rating on the Loan Participation Notes: affirmed at 'BB'
