OREANDA-NEWS. Fitch Ratings has affirmed OJSC PhosAgro's (PhosAgro) Long-term foreign currency Issuer Default Rating (IDR) and senior unsecured rating at 'BB+'. The Outlook on the IDR is Stable. A full list of rating actions is below.

The affirmation reflects Fitch's view that PhosAgro's leading and strong market position and cost competitiveness will continue to support its strong cash generation capacity and allow it to maintain credit metrics which are strong for the rating. PhosAgro has been aided by the devaluation of the rouble as the majority of PhosAgro costs are rouble-denominated while the majority of revenues are US dollar-linked. This is despite volatile pricing conditions, higher capex requirements in 2015 and 2016, and a large FX revaluation impact on US dollar-denominated debt. Other factors that we expect to impact PhosAgro's deleveraging include recovery in short-term phosphate pricing, higher than expected dividends, the investment strategy beyond 2017 and lower than expected phosphate capacity closures in China.

KEY RATING DRIVERS
Debt Revaluation Offset By Higher Earnings
Nearly 90% of PhosAgro's debt obligations are in US dollars. As the company reports in roubles, devaluation of the rouble results in an increase in its debt obligations on balance sheet. The rouble further depreciated against the US dollar over 2015 to USD/RUB 73 at end-2015 from 56 at the start of the year. The increase in debt is compensated by higher earnings, as 70% of earnings are received in mainly US dollars whilst costs remain rouble-denominated. As a result, Funds from operations (FFO) net adjusted leverage decreased to 1.7x at FYE15 from 2.8x at FY14.

Improvement in Leverage Drives Outlook
The improvement in FFO net adjusted leverage is broadly in line with Fitch's previous expectations and largely down to currency effects and volume increases despite the higher capex and pricing pressure PhosAgro faced in 2015. Fitch forecasts downward pricing pressure will continue on diammonium phosphate (DAP) and monoammonium phosphate (MAP) due to stagnant demand partly offset by slow levels of supply entering the market. However, forecast low capex post 2017 and management's commitment to pay down debt is currently driving leverage towards positive rating guidelines of 1.5x from 2018. This remains subject to volatile fertiliser pricing and USD/rouble fluctuations.

Fertiliser Pricing Pressure
Fitch assumes the pricing of phosphate fertilisers will come under pressure due to an excess in supply over the short to medium term, as well as continued low grain prices. Fitch also expects phosphate rock and phosphoric acid prices to come under pressure due to the relaxation of Chinese export duties and more capacity entering the market. DAP/MAP is not expected to be as impacted as urea. Oversupply of urea has and is forecast to continue to negatively impact pricing, with urea pricing decreasing by over 14% over 2015 whereas DAP/MAP will decrease by only 6% over 2015. It is unclear how cuts in Chinese subsidies and capacities may positively impact fertiliser demand and pricing.

Fitch notes that there is the potential for further domestic fertiliser price reductions to be introduced. However, we consider the impact of this to be small and still speculative, as the impact was limited in 2015 and Russian farmers are considered to be in a more stable condition compared with a year ago.

Peak Capex Worsened By Rouble Devaluation
PhosAgro's 2016 investment priority will continue to be the completion of the 760ktpa low-cost ammonia plant in Cherepovets as well as a new 500kt urea plant. In addition, capex will be spent on increasing phosphate fertiliser capacity and increasing production from the Kirovsk mining shaft. This is currently expected to peak in 2016 before significantly reducing from 2017. Overall capex has increased to around RUB42bn in 2015 and 2016 largely due to the weakened rouble (30% of capex is in foreign currency) but also due to the timing of projects.

Strong Market Position
With annual output of around 5.3m tonnes of DAP/MAP and other phosphate fertilisers, and phosphate rock capacity of 7.5m 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 also benefits from flexible production lines with over 40% of DAP/MAP capacity being switchable at minimal cost to complex nitrogen-phosphate-potash and nitrogen-phosphate-sulphur 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 among the best performing MAP/DAP producers on the global cash curve as costs are predominantly rouble denominated. The group's production flexibility is also expected to support capacity utilisation rates and EBITDA margin, which is forecast to increase to over 40% in 2015.

However, along with other Russian corporates, the group could face additional cost pressures due to high inflation impacting input prices in the coming year. 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.

Self Sufficiency in Raw Materials
The company owns phosphate rock deposits with more than 2bn tonnes of high-quality resources according to the JORC (Joint Ore Reserves Committee) Code, and ammonia production facilities that currently cover 80% of its internal requirements. In Fitch's view, the concentrated supply structure of phosphate rock and the depletion of phosphate rock deposits held by some producers may give the remaining phosphate rock producers greater pricing power in the longer term, 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 two notches, which we typically apply to most Russian corporates. Excluding these risks, Fitch assesses PhosAgro's credit profile in the 'BBB' category.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for PhosAgro include:
- Fitch Brent Price Deck of USD45/barrel in 2016, USD55/barrel in 2017 and USD65/barrel in 2018.
- USD/RUB forecast in line with oil price and moves from 68 in 2016 to 61 in 2017 and 56 in 2018.
- Inflation assumed at 10% in 2016 before reducing to 5% on average from 2017.
- RUB3bn restricted cash.
- DAP/MAP to average USD440/t over the next few years from USD465/t in 2015.
- Dividends assumed at roughly 50% of the net income over a two-year average.

RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- FFO adjusted net leverage sustainably below 1.5x.
- Effective ring-fencing measures, protecting PhosAgro from a concentrated ownership structure.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- FFO adjusted net leverage sustainably above 2.5x.
- EBITDAR margin sustainably below 20%.

LIQUIDITY
Fitch estimates that PhosAgro has sufficient liquidity to year-end 2017. PhosAgro is very cash generative and has historically had low debt 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 3.6%. Debt maturities are spread evenly over the next four years and PhosAgro is projected to be free cash flow positive from 2017 when capex is currently expected to slow down. Management have made clear its intentions to buy back RUB10bn of debt in 2016.

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+'.