OREANDA-NEWS. Fitch Ratings says Uralkali's USD1.5bn share buyback will place pressure on the Russian chemicals group's credit profile, in particular on its 2015 funds from operations (FFO) net leverage ratio. The share buyback will replace the 2015 dividend payment and marks a departure by Uralkali from both deleveraging and a previously guided net debt-to-EBITDA target of below 2x. Fitch rates Uralkali BBB- with a Negative Outlook.

The share buyback is a return to a more aggressive financial policy, especially at a time of higher capex commitments and reduced production capacity following the November 2014 Solikamsk-2 mine accident, a higher USD-denominated debt level due to a weak rouble, and a continued weak Potash pricing environment. Recently Uralkali's Chinese Potash agreement was signed at USD315/t, a slight improvement on the USD305/t agreed in 2014.

Uralkali had in July 2013 carried out share buybacks to the detriment of its credit profile and the recent share buyback announcement is a departure from previously communicated credit protection measures in favour of shareholder returns. Uralkali has also committed to a new dividend policy which allows the Board to set any level of dividend (previously set at 50% of net income).

The USD1.5bn share buyback follows Uralkali's posting a net loss in 2014 due to a large foreign exchange charge on its USD denominated debt. However, the cash outgoings of the share buyback is three times what we had previously assumed for a dividend. Our initial forecasting suggests this may cause our negative downgrade guideline of FFO net leverage above 2.5x to be breached in 2015 before a return below this level in subsequent years.

Uralkali benefits from a strong Potash cost position, aided by weakening rouble costs and USD-linked revenues, as well as a solid EBITDA margin. Liquidity is adequate (USD3.2bn available cash at 24 April 2015) due to Uralkali's strong cash generation, and continued access to finance. The share buyback is therefore expected to be covered by available cash, and we expect sufficient liquidity to cover operational needs and debt maturities.