Moody's Downgrades PotashCorp (POT) to 'Baa1'

November 4, 2016 11:43 AM EDT

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Moody's Investors Service, ("Moody's") downgraded Potash Corporation of Saskatchewan Inc. (NYSE: POT) ratings to Baa1 from A3 due to the deterioration in fertilizer industry conditions that are expected to persist for longer than previously expected. Moody's expects Potash's credit metrics to weaken as a result of lower fertilizer prices and the potential for increased market volatility as new potash and nitrogen fertilizer capacity comes on-stream over the next two years. Moody's affirmed Potash's commercial paper rating at Prime-2. The ratings remain under review for downgrade due to its pending merger with Agrium Inc. (Baa2 review for upgrade).

"Although management has taken significant steps to retain the A3 rating, market conditions will make it extremely difficult for the company to generate credit metrics that would support the A3 rating over the next two years," stated John Rogers, Senior Vice President at Moody's Investors Service.

The following rating actions were taken:

Downgrades:

..Issuer: Potash Corporation of Saskatchewan Inc.

....Senior Unsecured Regular Bond/Debenture (Foreign Currency), Downgraded to Baa1 from A3; Placed Under Review for further Possible Downgrade

....Senior Unsecured Shelf (Foreign Currency), Downgraded to (P)Baa1 from (P)A3; Placed Under Review for further Possible Downgrade

Affirmations:

..Issuer: Potash Corporation of Saskatchewan Inc.

....Senior Unsecured Commercial Paper (Foreign Currency), Affirmed P-2

RATINGS RATIONALE

The downgrade reflects Moody's expectation that the decline in fertilizer prices over the past two years combined with new capacity coming on-stream over the next two years will result in persistently low pricing into 2018 at a minimum, and will result in further weakening of metrics with leverage likely remaining above 3.0x for more than a year. Specifically, the fertilizer markets are under pressure as low crop prices have greatly reduced farmer incomes muting volume growth, despite lower prices. In addition, the potash and nitrogen fertilizer markets have undergone a more significant decline in prices due to the addition of new capacity. Although potash has experienced a modest improvement in prices since mid-year, prices are still extremely low and additional capacity is set to come on-stream in 2017 and 2018. Similarly, nitrogen fertilizer prices have hit unusually low levels in 2016 with additional new capacity coming on-stream in North America before year-end and in 2017.

Despite management's conservative financial philosophy and a 70% cut in the dividend so far in 2016, the downgrade is due to depressed market conditions, which will weaken credit metrics to levels that are not appropriate for the A3 rating. This downgrade is not related to Potash's merger with Agrium.

The review for downgrade will focus on the merger with Agrium and the combined company's financial policies post-merger. Additionally, it will focus on management's priorities cash, specifically debt reduction, capital spending, acquisitions, dividend growth and share repurchases, as well as management's longer term targets for financial metrics over the cycle. Moreover, Moody's will examine the ability of the combined company to generate free cash flow and de-lever, over the 12-18 months following the closing. The merger has a strong strategic rationale and should provide stability to the combined company's financial metrics. Moody's believes that the combination of Agrium and Potash should relieve some of the current margin pressure due to the expectation for significant synergies subsequent to the merger, with the largest benefit coming from increasing the sales of Potash's fertilizers to Agrium's retail farm stores. Management expects to generate roughly $500 million in synergies within two years after the closing. Other synergies include shifting more production to lower cost manufacturing sites, reducing corporate costs and procurement savings.

The two companies, based on June 30, 2016 LTM data, had combined sales of $18.1 billion, reported EBITDA of $3.74 billion and balance sheet debt of $10.2 billion. Moody's adjusted Debt/EBITDA is 2.8x for the combined entity before synergies, and 2.5x including synergies. However, due to the pressure on fertilizer prices in 2016 and 2017 leverage is likely to increase to just over 3x through the end of 2017 including synergies. While this is expected to be the trough of the cycle for the combined company, Potash's standalone metrics and the combined companies projected metrics would be too weak to support Potash's current A3 rating, especially if the fertilizer markets remain challenged for an extended period.

The principal methodology used in these ratings was Global Chemical Industry Rating Methodology published in December 2013. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.



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