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Fitch Revises PhosAgro's Outlook to Positive; Affirms at 'BB+'

February 15, 2017 | Cbonds

Fitch Ratings has affirmed PhosAgro's Long-Term Foreign-Currency Issuer Default Rating (IDR) and senior unsecured rating at 'BB+' and has revised the Outlook on the IDR to Positive from Stable. A full list of rating actions is below.

The Outlook revision reflects Fitch's expectation of PhosAgro reaching its positive leverage guideline over the rating horizon of 1.5x FFO net adjusted leverage by 2019 following the completion of its expansion capex programme. This is underpinned by PhosAgro's strong market position and market-leading cost competitiveness which continues to support its strong cash generation capacity and allows it to reduce leverage at a time of low fertiliser prices and moderate capex.

KEY RATING DRIVERS
Phosphate Pricing Bottoming Out: Phosphate fertiliser prices dropped by 25%-30% during 2016. In particular, diammonium phosphate (DAP) FOB US Gulf was at USD325/t in January 2017, up from its USD315/t low in December 2016, but lower than the 2016 average of USD345/t and the 2015 average of USD459/t. Fitch Ratings expects DAP pricing to have bottomed out as additional capacity from Office Cherifien des Phosphates (OCP: BBB-/Negative) and Ma'aden (not rated) is offset by capacity reduction in China, and also supported by feedstock (ammonia) price increases and robust demand.

We however see the longer-term DAP price increase being limited despite feedstock price increases. This is due to low global operating rates higher up the cost curve as well as due to the flattening of the global cost curve driven by new above-mentioned capacity.

Urea Pricing Modest Recovery: Urea pricing reached a trough in mid-2016 and has been increasing since 4Q16 into 2017. An increase in coal prices is driving up Chinese urea producers' costs, and as a result there is a tightening in the regional supply/demand balance, reinforced by a build-up of inventory ahead of the spring application season. In addition, tighter domestic pricing and low operating rates in China leading to China exporting less urea suggest an increase in urea prices, aided by a moderation in post-2017 global urea capacity additions.

Strong Performance Despite Pressure: PhosAgro's credit profile has remained strong during the ongoing broad market pressure if compared to its peers like Mosaic (BBB-/Stable) due to the rouble depreciation pushing it to the first position on the DAP cash cost curve since 2015, as the majority of its costs are rouble-denominated. PhosAgro also has a smaller capex programme than peers such as OCP, which peaked in 2016 and which will be reduced after 2016 as it completes its 760kt ammonia and 500kt urea plants, as well as mining and beneficiation capex.

Capex Moderate After 2018: PhosAgro's capex will remain significant over 2017 and 2018 as it aims to further secure its raw material supply and attain full vertical integration through the construction of new low-cost ammonia and urea plants in Cherepovets, expansion at the Kirovsk phosphate mining site and further efficiencies in its production lines. Fitch views PhosAgro's investment strategy as neutral. 2015 and 2016 were peak years in capex, with capex to EBITDA moderately exceeding the company's target of 50% due to a combination of the FX impact on capex (30% is driven by hard currencies) and operational cash-flow pressure from weaker fertiliser markets.

Most projects are close to completion, with expectations that capex will normalise at a level considerably below the company's target of 50% capex to EBITDA after 2018.

Management Commitment to Reduce Leverage: Management has a publicly announced target to de-lever to 1x net debt/EBITDA, which it came close to reaching in 2015 after paying back debt and posting record earnings. The company deviated from the target in 2016 due to the fertiliser price fall combined with the temporary capex peak and a dividend payout that was linked to the previous year's strong performance. Large capex projects will come to an end in 2017 and with prices expected to bottom out at current levels, Fitch forecasts PhosAgro will be able to achieve its positive guideline after 2018 and foresees a general reduction in leverage over the rating horizon.

A combination of dividend policy (up to 50% of net income) and capex policy (up to 50% of EBITDA) would translate into neutral free cash-flow generation and an ability to stay at a targeted leverage level given broadly stable fertiliser and FX markets. However, significant market volatility, similar to that in 2015-2016, may translate into a deviation from the company's commitment to reduce leverage. Remedial measures such as a temporary dividend and/or a capex cut would become critical to the company's ability to revert to the targeted leverage level within a reasonable period.

DERIVATION SUMMARY
PhosAgro's 'BB+' rating corresponds to a 'BBB' standalone rating excluding the two-notch corporate governance discount which is the highest rating amongst all Fitch-rated fertiliser companies. This reflects PhosAgro's strong operational cash-flow generation which largely covers its capex and dividends, as well as operations being in the first quartile of the global phosphate fertilisers cost curve. Its phosphate peers include OCP (BBB-/Negative) and Mosaic (BBB-/Stable), both leveraged at over 4x on low fertiliser pricing and expected by Fitch to deleverage towards 3x over the rating horizon as OCP completes its capex programme and Mosaic deleverages after its acquisition of Vale's fertiliser assets.

PhosAgro's Russian peers include EuroChem (BB/Negative) and Uralkali (BB-/Negative), both on Negative Outlook. EuroChem is facing low fertiliser prices and is expected to reduce leverage after its 2017 capex peak as its potash projects come online. Uralkali's 2015-2016 share buybacks, amidst low fertiliser pricing, are driving its Negative Outlook. The ability to reduce leverage in a depressed price environment is key in current market circumstances.
No country-ceiling, parent/subsidiary or operating environment aspects impact the rating.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- DAP/MAP FOB Tampa to average at USD330/t in 2017-2018 before moving up to USD350/t by 2020;
- USD/RUB forecast to move from 61 in 2017 towards 57 in 2020;
- dividend payout assumed to moderate at 40% in 2017 before increasing towards 50% in 2019-2020.

RATING SENSITIVITIES
Future Developments That May, Individually or Collectively, Lead to Positive Rating Action
- Post-2017 positive FCF leading to debt reduction and FFO adjusted net leverage at or below 1.5x
- Evidence of moving towards management's leverage target of net debt-to-EBITDA of 1x
Future Developments That May, Individually or Collectively, Lead to Negative Rating Action
- FFO adjusted net leverage sustainably at or above 2.5x
- EBITDAR margin sustainably below 20%

LIQUIDITY
Liquidity Remains Healthy: PhosAgro maintained strong liquidity throughout 9M2016 with its cash position (RUB23bn at end-3Q16) exceeding its short-term debt (end-3Q16: RUB17bn). Our expectations of positive free cash-flow generation in 2017 coupled with significant committed undrawn facilities add comfort to the issuer's liquidity level.

FULL LIST OF RATING ACTIONS

OJSC PhosAgro
Foreign-Currency Long-Term IDR: affirmed at 'BB+'; Outlook revised to Positive from 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 revised to Positive from Stable;
Local-currency senior unsecured rating: affirmed at 'BB+'

PhosAgro Bond Funding Limited:
Foreign-currency senior unsecured rating on the loan participation notes: affirmed at 'BB+'

Company: Phosagro

Full company namePSC Phosagro
Country of riskRussia
Country of registrationRussia
IndustryChemical and petrochemical industry

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