Fitch Affirms OJSC PhosAgro at 'BB '; Stable Outlook
The affirmation reflects Fitch's view that Phosagro's market position and cost competitiveness, which has been aided by the devaluation of the rouble (the majority of Phosagro's costs are rouble denominated while the majority of revenues are US dollar linked), will continue to support its strong cash generation capacity and allow it to maintain credit metrics that remain within guidelines. This is despite volatile pricing conditions, higher capex requirements, pressure on the domestic pricing of fertilisers and a large FX revaluation impact on US dollar-denominated debt.
KEY RATING DRIVERS
Debt Revaluation Offset By Higher Earnings
The rouble substantially depreciated against the US dollar over 4Q14 from USD/RUB of 40 to 60. As close to 90% of PhosAgro's debt obligations are in US dollars and reports in roubles, this means that debt will be re-denominated on the balance sheet at a higher amount. This increase in debt is compensated by higher export earnings due to 70% of earnings being received in mainly US dollars.
Capex and pricing volatility pushed FFO net adjusted leverage to over Fitch's guideline of 2.5x in 2013, with Fitch forecasting leverage to remain at around 2.6x in 2014 due to the re-denominating dollar effect only being partially compensated by higher earnings for 4Q14. Fitch forecasts the rouble will remain at a similar level over 2015 and therefore forecasts leverage to decrease to around 1.6x on average from 2015 once a full year's impact of higher earnings is received, and without any substantial pricing volatility.
Tight Pricing, Domestic Fertiliser Discounts
Fitch assumes the pricing of phosphate fertilisers will remain at current levels or decrease due to an excess in supply over the short to medium term, as well as a lower grain price environment. We expect the relaxed Chinese export duty and urea oversupply for 2015 to negatively impact urea pricing. However, given the higher value nature and comparative inelasticity of phosphate fertilisers compared to nitrogen fertilisers, we expect the impact to be limited.
Following the recent announcement by the Russian government on fertiliser price reductions for domestic farmers, Fitch includes a conservative discount of 20% to the export price within the base case for 2015, and assumes a 20% decrease in domestic demand being exported instead. PhosAgro is the largest domestic fertiliser supplier to Russia and as a result Fitch forecasts a negative impact on EBITDA of around RUB3.8bn.
Peak Capex Worsened By Rouble Devaluation
PhosAgro's 2015 investment priority is a 760ktpa low-cost ammonia plant in Cherepovets as well as a new 500kt urea plant. The ammonia project is worth RUB32bn, with RUB18bn of the project expected to be spent in 2015. Overall capex is projected to increase from around RUB19bn in 2014 to RUB36bn in 2015 (previously forecast at RUB24bn), largely due to the weakened rouble (60% of capex is in foreign currency) but also due to the timing of projects. Fitch notes around 25% of 2015 capex could be pushed back to 2016.
Strong Market Position
With annual output of around 3.6m tonnes of diammonium phosphate (DAP) and monoammonium phosphate (MAP) and overall fertiliser, feed phosphate and technical phosphate capacity of over 6.4m tonnes, PhosAgro is the third-largest global producer (excluding China) of phosphate fertilisers behind MOS Holdings Inc (BBB/Stable) and Office Cherifien des Phosphates (OCP: BBB-/Stable).
The group receives around 85% of its gross profit from phosphate fertilisers, but can benefit from flexible production lines with over 40% of DAP/MAP capacity being switchable at minimal cost to complex nitrogen-phosphate-potash (NPK) and nitrogen-phosphate-sulphur (NPS) fertiliser production.
Competitive Cost Position
PhosAgro's vertically integrated business model with access to local low-cost feedstock (phosphate rock and ammonia) contributes to a low operating cost position compared to its competitors. With the recent rouble devaluation, PhosAgro is now the best performing MAP/DAP producer on the global cash curve as around 85% of costs are rouble based. The group's production flexibility is also expected to support capacity utilisation rates and EBITDA margin, which is forecast to remain healthy at 32% in 2014.
However, along with other Russian corporates, the group could face additional cost pressures due to high inflation impacting regulated natural gas prices in the coming years. This may negatively affect the company's margins, although Fitch notes that PhosAgro may be able to partially offset this with improvements in gas consumption efficiency at its ammonia plants, and also should the time lag on gas prices catch up with low oil prices.
Self Sufficiency in Raw Materials
The company owns phosphate rock deposits with more than 2bn tonnes of high-quality resources according to the JORC Code, and ammonia production facilities that cover between 72% and 90% of its internal requirements. In Fitch's view, in the longer term the concentrated supply structure of phosphate rock and the depletion of phosphate rock deposits held by some producers will provide greater pricing power to the remaining phosphate rock producers given the relatively inelastic and increasing demand for phosphates.
Country Risk and Corporate Governance
PhosAgro has a limited geographic footprint with all of its assets in Russia, which entails higher than average political, business and regulatory risks, and in addition has a concentrated ownership structure. The rating is therefore notched down by 2 notches. Excluding these risks, Fitch assesses PhosAgro's credit profile in the 'BBB' category.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Fitch Brent Price Deck of USD55/barrel in 2015, USD65/barrel in 2016 and USD80/barrel in 2017.
- USD/RUB forecast in line with oil price and moves from USD/60 RUB in 2015 to USD/58.9 RUB in 2016 and USD/53.9/RUB in 2017.
- Inflation assumed at 14% in 2015, 10% in 2016 and 8% in 2017.
- RUB3bn restricted cash.
- Capex in line with management's forecast, but re-based on Fitch's USD/RUB assumptions for 60% of capex.
- A 20% discount has been assumed for domestic fertilisers, which is offset by a 20% decrease in domestic demand being exported instead, leading to a negative RUB3.8bn earnings impact. No export duties are assumed.
- Dividend assumption of RUB6bn in 2014, despite net income projected to be negative in 2014. Thereafter assumed at 40% pay out of net income.
RATING SENSITIVITIES
Positive: Future developments that could lead to positive rating action include:
- FFO adjusted net leverage below 1.5x.
- Effective ring-fencing measures, protecting Phosagro from a concentrated ownership structure.
Negative: Future developments that could lead to negative rating action include:
- FFO adjusted net leverage sustainably above 2.5x.
- EBITDAR margin sustainably below 20%.
LIQUIDITY AND DEBT STRUCTURE
PhosAgro is cash generative and has historically had a low debt level and a healthy capital structure, which makes it a prime-class borrower in the Russian lending market. Access to domestic and international debt capital markets has been strong and as a result PhosAgro has an all in low cash interest cost of 3.4%. Debt maturities are spread evenly over the next four years and PhosAgro is projected to be free cash flow positive from 2015. Fitch estimates that PhosAgro has sufficient liquidity to year-end 2017.
FULL LIST OF RATING ACTIONS
OJSC PhosAgro:
Foreign currency Long-term IDR: affirmed at 'BB+'; Outlook Stable
Foreign currency Short-term IDR: affirmed at 'B';
Foreign currency senior unsecured rating: affirmed at 'BB+';
Local currency Long-term IDR: affirmed at 'BB+'; Outlook Stable
Local currency senior unsecured rating: affirmed at 'BB+';
National Long-term rating: affirmed at 'AA(rus)'; Outlook Stable
Phosagro Bond Funding Limited:
Foreign currency senior unsecured rating on the Loan Participation Notes: affirmed at 'BB+'
Комментарии