OREANDA-NEWS. Fitch Ratings, London/Moscow, 15 January 2016: Fitch Ratings has revised Swiss-based holding company Eurochem Group AG's (EuroChem) and Russia-based JSC MCC EuroChem's Outlook to Negative from Stable while affirming their Long-term Issuer Default Ratings (IDR) at 'BB'.

The Negative Outlook is driven by forecast funds from operations (FFO) adjusted net leverage (leverage) peaking at over 3x and exceeding Fitch's negative rating guidance of 2.5x over the next two years. This is largely due to the company implementing capex for its potash and ammonia project at a time of low fertiliser prices, which is not fully offset by lower costs.

The affirmation reflects EuroChem's strong business profile with self-sufficiency in ammonia and phosphates in Russia, a strong market presence in Europe and CIS, and robust diversification across fertiliser products. The business profile will be further enhanced by EuroChem's upcoming potash projects which are forecast to come on stream from 2018 and be within the first quartile of the global potash cost curve, aided by a projected weak rouble.

KEY RATING DRIVERS
Capex Projects Pressurise Leverage
Management is committed to the VolgaKaliy and Usolskiy potash projects, which aim to commence operations in late 2017 to early 2018 targeting at 2.3mtpa of potash capacity each. These are estimated to have a first-quartile position on the global potash cost curve and will more than cover EuroChem's internal potash needs and provide it with diversification into all three nutrients.

On top of the potash projects, the 1mtpa ammonia project will also help push leverage over our negative rating guidelines over the next couple of years to over 3x until the potash projects come on stream in 2018. We expect leverage to remain over our guidelines even after taking into consideration EuroChem's proven flexibility to suspend shareholder distributions and to delay capex when needed.

Strong Business Fundamentals
EuroChem is strongly present in European and CIS fertiliser markets (67% of sales) and ranks as the seventh-largest fertiliser player by nutrient capacity in EMEA. EuroChem's Russian-based self-sufficient nitrogen and phosphate production assets have moved to the first quartile of the global cash cost curves following the recent depreciation of the rouble. The company has access to the premium European compound fertiliser market with its own production capacities (in Antwerp, Belgium), trademarks and distribution network. This, as well as strong EBITDA margins of around 30%, gives EuroChem a stand-alone rating of 'BBB-' and an IDR of 'BB' after applying the two-notch corporate governance discount that Fitch typically applies to Russian corporates.

Weak Fertiliser Pricing
Pricing across all nutrients came under pressure during 2015 and is being impacted by cheap gas, weak demand on the back of a low grain price environment, and excess supply entering the market. Fitch forecasts this weak pricing environment will remain over the next 3 years, which will place pressure on earnings of EuroChem and its forthcoming projects. Rouble depreciation has, however, helped maintain margins as revenues are dollar-denominated while costs are mainly rouble-linked.

Project Financing Facilities Consolidated
EuroChem has successfully procured project financing for its Usolskiy Potash project and its Baltic ammonia project. Even though the financing is specific to the projects and has non-recourse features that separate it from EuroChem's outstanding debt, Fitch continues to consolidate the projects and the financing within its overall leverage metrics. This is due to the strategic importance of the projects to EuroChem's future operational profile and the inclusion of a cross default clause within the financing agreement.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:

- Nitrogen segment pricing to fall 2%-4% in 2016 following a 12%-18% decline in 2015, phosphate and complex fertiliser segment pricing to fall by mid-single digits in 2016 following almost flat dynamics in 2015
- Volumes broadly flat until 2017 following additions from the new 300kt low density AN project and Kazakh phosphates project
- USD/RUB to hit 65 in 2016 before gradually strengthening towards 50 by 2018
- Capex/sales to peak in 2016-2017 at 27% before falling back in 2018 towards 2015 levels of 23%
- Despite no significant dividends until 2018, high capex will lead to low single-digit negative free cash flow (FCF) in 2016-2018

RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Successful completion of one of the ongoing potash projects resulting in an enhanced operational profile, or an FFO adjusted net leverage trending towards 2.5x;

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Continued aggressive capex or shareholder distributions translating into FFO adjusted net leverage not trending towards 2.5x by 2019, coupled with failure to enhance the operational profile over the medium term;
- Protracted pricing pressure or double-digit cost inflation in 2016 leading to an EBITDAR margin being sustained below 20% (2015E: 35%)

LIQUIDITY AND DEBT STRUCTURE
At end-3Q15, EuroChem's liquidity gap was USD221m as short-term loans including derivatives were USD1,044m against USD578m cash and cash equivalents and fixed-term deposits, and USD245m committed undrawn non-project facilities. However, we expect EuroChem to draw down on at least USD300m of the USD750m committed Usolskiy facility in 2016, which will cover EuroChem's liquidity needs in 4Q15-3Q16, given its almost neutral FCF over the period.

FULL LIST OF RATING ACTIONS
JSC MCC EuroChem:
Long-term foreign and local currency IDRs: affirmed at 'BB'; Outlook Negative
National Long-term rating: affirmed at 'AA-(rus)'; Outlook Negative
Short-term foreign currency IDR: affirmed at 'B'
Local currency senior unsecured rating (domestic bonds): affirmed at 'BB'
National Long-term unsecured rating (domestic bonds): affirmed at 'AA-(rus)'

EuroChem Group AG:
Long-term foreign currency IDR: affirmed at 'BB'; Outlook Negative

EuroChem Global Investments Limited:
Foreign currency senior unsecured rating on the loan participation notes: affirmed at 'BB'.