Moody's Places Compass Minerals' (CMP) Ratings Under Review for Downgrade
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Moody's Investors Service (Moody's) placed the Ba1 corporate family rating, Ba1-PD probability of default rating and instrument ratings of Compass Minerals International, Inc. (NYSE: CMP) under review for downgrade following the company's announcement that it plans to acquire the remaining 65% ownership in Brazilian specialty plant nutrition company, Produquimica Industria e Comercio S.A. (Produquimica). The expected price for the remaining 65 percent of equity in Produquimica is expected to range from $460million to $480 million, including assumption of debt. The company plans to finance the transaction with debt.
"Weaker earnings as a result of a mild 2015-2016 winter, weak agricultural markets, continued elevated capital spending for capacity expansions in 2016 and 2017 combined with the high valuation multiple associated with the acquisition of the remaining equity in Produquimica elevates the risk that leverage could remain above expected levels for the Ba1 rating for an extended period of time," said Moody's analyst, Anastasija Johnson.
On Review for Downgrade:
Issuer: Compass Minerals International Inc
-Probability of Default Rating, Placed on Review for Downgrade, currently Ba1-PD
-Corporate Family Rating, Placed on Review for Downgrade, currently Ba1
-Senior Secured Revolving Credit Facility due July 2021, Placed on Review for Downgrade, currently Ba1 (LGD3)
-Senior Secured Term Loan, Placed on Review for Downgrade, currently Ba1 (LGD3)
-Senior Unsecured Notes due July 2024, Placed on Review for Downgrade, currently Ba2 (LGD5)
-Outlook, Changed To Rating Under Review From Negative
-Speculative Grade Liquidity Rating, unchanged at SGL-3
The placement of Compass Minerals ratings under review reflects expectations that leverage could remain elevated due to the high multiple paid for Produquimica and the lack of free cash generation at Compass. Additionally, the company will likely face increased headwinds in 2017 due to lower crop prices, as well as weaker earnings from its salt segment following a mild 2015-2016 winter season. Pro forma for the acquisition, leverage increases to 3.5 times in the twelve months ended June 30, 2016 from 2.7 times actual. However, Moody's expects leverage to rise close to 4 times by the end of 2016 as a result of the expected decline in salt and specialty potash fertilizer volumes and prices. Leverage is also rising at a time when the company continues to have elevated capital expenditures for its capacity expansion projects and is not expected to generate free cash flow for debt repayment. In addition, it is acquiring a lower margin business. Therefore, deleveraging over the next two years would depend on a recovery in salt pricing and volume increases to generate higher than expected earnings and cash flow. The review will focus on the target company's audited financials and liquidity arrangements. The review will also focus on Compass Minerals projections, its ability to reduce leverage below 3.5 times within two years and expected liquidity given seasonal nature of working capital needs in both salt and fertilizer businesses. If Moody's determines that subsequent to the acquisition of Produquimica Compass' leverage is likely to remain above 3.5x for more than two years, the company's CFR could be lowered by a notch.
Compass Minerals' Ba1 corporate family rating reflected historically low leverage and strong margins over most of the cycle. The rating also reflected Compass Minerals' secure access to high quality and low-cost salt deposits, and efficient distribution network that utilizes low-cost water transportation. The company is also the largest North American producer of sulfate of potash (SOP) fertilizer and benefits from its low-cost production of SOP from naturally occurring brines. The ratings are limited by Compass Minerals small scale as measured by net sales, net assets, as well as a narrow product portfolio that is significantly exposed to weather-driven demand volatility for rock salt. Compass Minerals' salt segment represents approximately 80% of net sales, while the plant nutrition fertilizer business contributes roughly 20%. The weather-dependent highway deicing business, which is a part of the salt segment, alone generates around 50% of the company's net sales. The warm winter of 2015/16 has put pressure on rock salt prices in the current contract season and volumes may decline further if the beginning of the 2016/17 winter is warm as well. Additionally, Compass' credit profile reflects the mature and seasonal nature of the highway deicing business in the US, as well as the company's need to pursue capital projects or acquisitions in order to provide a more attractive increase in revenue and earnings growth for its shareholders.
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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