S&P Puts Russia's Uralkali OJSC on CreditWatch Negative (MOS) (POT) (AGU)
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Standard & Poor's Ratings Services said today it had placed its 'BBB-' long-term corporate credit rating and 'ruAAA' Russia national scale rating on Uralkali OJSC, a Russia-based producer of potash fertilizers, on CreditWatch with negative implications.
The CreditWatch placement follows Uralkali's announcement on July 30, that it had stopped export sales through Belarusian Potash Company (BPC), one of the two largest sellers in the market, while aiming at much higher volumes from 2013 after a strategy reassessment. These developments could lead to heightened and prolonged price pressures in the global potash industry, in our view, which could erode Uralkali's credit metrics to below our parameters for the 'BBB-' rating. We see a ratio of adjusted debt to EBITDA of about 1.5x or less, under normal pricing conditions, as rating commensurate.
Against that backdrop, Uralkali's recent large $1.3 billion share buyback, through which it bought out one of five major shareholders, has reduced the leeway under the current rating.
The potash industry players have benefited in the past several years from price control, achieved through volume cuts by major producers at times of weak demand. Underpinning that approach, major producers have concentrated their export sales through two joint ventures that controlled 67% of global export sales in 2012. BPC, which had the exclusive rights to export for Uralkali and Belarusian state-owned Belaruskali, represented 42% of global export sales in 2012, ahead of Canpotex (25%), the North American organization handling exports of Potash Corp. of Saskatchewan, The Mosaic Co., and Agrium.
Along with the exit from BPC, Uralkali announced its intention to increase volumes to reach full capacity (13 million tonnes, compared with 9 million produced in 2012), even if this means potentially lower prices, since, among other factors, higher volumes could offset lower prices.
If prices were to sustainably decline to almost $300 per tonne, this could push Uralkali's adjusted debt to EBITDA above 2x, compared with our 1x-1.5x guideline for the current rating.
Still, it remains to be seen to what extent prices may fall and for how long, and what would be the impact on Uralkali's financials. Uralkali, as one of the lowest cost producers in the industry (with the EBITDA margin exceeding 50% in 2012), is well positioned to withstand lower prices. Also, this uncertain price environment could cut or postpone planned capacity expansions in the industry, benefiting existing and low-cost players, such as Uralkali.
Our current rating on Uralkali reflects our view of the company's "satisfactory" business risk profile and "intermediate" financial risk profile. Key strengths include Uralkali's currently high profitability, large reserves, low-cost production, and a large market share. Key risks include inherent cyclicality and volatility of the potash market, Uralkali's concentration on a single market, and the risks of operating in Russia.
We aim to resolve the CreditWatch within three months, after assessing price developments and business prospects in the industry, and Uralkali's strategy and ability or willingness to increase volumes and protect prices, and its financial policy, including net debt to EBITDA, investments, and shareholder distributions.
For the current rating, and given our view on the risks of operating in a volatile industry and in Russia, we see an adjusted debt-to-EBITDA ratio of about 1.5x or less, under normal pricing conditions, as rating commensurate. We could lower the rating if adjusted debt to EBITDA exceeded 2.0x in a downturn, without near-term prospects for recovery or appropriate measures from management.
*** On watch include fertilizer names like Potash Corp. (NYSE: POT), Mosaic Co (NYSE: MOS), Agrium Inc. (NYSE: AGU), and CF Industries (NYSE: CF).
The CreditWatch placement follows Uralkali's announcement on July 30, that it had stopped export sales through Belarusian Potash Company (BPC), one of the two largest sellers in the market, while aiming at much higher volumes from 2013 after a strategy reassessment. These developments could lead to heightened and prolonged price pressures in the global potash industry, in our view, which could erode Uralkali's credit metrics to below our parameters for the 'BBB-' rating. We see a ratio of adjusted debt to EBITDA of about 1.5x or less, under normal pricing conditions, as rating commensurate.
Against that backdrop, Uralkali's recent large $1.3 billion share buyback, through which it bought out one of five major shareholders, has reduced the leeway under the current rating.
The potash industry players have benefited in the past several years from price control, achieved through volume cuts by major producers at times of weak demand. Underpinning that approach, major producers have concentrated their export sales through two joint ventures that controlled 67% of global export sales in 2012. BPC, which had the exclusive rights to export for Uralkali and Belarusian state-owned Belaruskali, represented 42% of global export sales in 2012, ahead of Canpotex (25%), the North American organization handling exports of Potash Corp. of Saskatchewan, The Mosaic Co., and Agrium.
Along with the exit from BPC, Uralkali announced its intention to increase volumes to reach full capacity (13 million tonnes, compared with 9 million produced in 2012), even if this means potentially lower prices, since, among other factors, higher volumes could offset lower prices.
If prices were to sustainably decline to almost $300 per tonne, this could push Uralkali's adjusted debt to EBITDA above 2x, compared with our 1x-1.5x guideline for the current rating.
Still, it remains to be seen to what extent prices may fall and for how long, and what would be the impact on Uralkali's financials. Uralkali, as one of the lowest cost producers in the industry (with the EBITDA margin exceeding 50% in 2012), is well positioned to withstand lower prices. Also, this uncertain price environment could cut or postpone planned capacity expansions in the industry, benefiting existing and low-cost players, such as Uralkali.
Our current rating on Uralkali reflects our view of the company's "satisfactory" business risk profile and "intermediate" financial risk profile. Key strengths include Uralkali's currently high profitability, large reserves, low-cost production, and a large market share. Key risks include inherent cyclicality and volatility of the potash market, Uralkali's concentration on a single market, and the risks of operating in Russia.
We aim to resolve the CreditWatch within three months, after assessing price developments and business prospects in the industry, and Uralkali's strategy and ability or willingness to increase volumes and protect prices, and its financial policy, including net debt to EBITDA, investments, and shareholder distributions.
For the current rating, and given our view on the risks of operating in a volatile industry and in Russia, we see an adjusted debt-to-EBITDA ratio of about 1.5x or less, under normal pricing conditions, as rating commensurate. We could lower the rating if adjusted debt to EBITDA exceeded 2.0x in a downturn, without near-term prospects for recovery or appropriate measures from management.
*** On watch include fertilizer names like Potash Corp. (NYSE: POT), Mosaic Co (NYSE: MOS), Agrium Inc. (NYSE: AGU), and CF Industries (NYSE: CF).
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