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


14 Feb 2017 10:34 AM


Fitch Ratings-Moscow/London-14 February 2017: 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+'

Contact:
Principal Analyst
Dmitri Kazakov, CFA
Associate Director
+7 495 956 7075

Supervisory Analyst
Amee Attri
Director
+44 20 3530 1617
Fitch Ratings Limited
30 North Colonnade
London E14 5GN

Committee Chairperson
Maxim Edelson
Senior Director
+7 495 956 9986

Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: julia.belskayavontell@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com.

Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary.

Summary of Financial Statement Adjustments
- A 6x multiple applies to RUB278m operating lease expenses in 2015 as the issuer's assets are concentrated in Russia
- RUB3bn reclassified to restricted/not readily available cash
- RUB915m profit on disposal of property, plant and equipment, and RUB956m fines and penalties received were reclassified as non-operating expenses

Applicable Criteria
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 21 Nov 2016)

Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
Solicitation Status
Endorsement Policy


ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.
Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001