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Announcement:

Moody's: Uralkali's $1.32 billion share buyback programme is credit negative but no immediate impact on the rating

26 Aug 2015

London, 26 August 2015 -- Moody's Investors Service said today that Uralkali PJSC's (Uralkali, Ba1 negative) announcement that it will initiate an additional share buyback programme worth up to $1.32 billion is credit negative, but there is no immediate impact on its Ba1 corporate family rating. The outlook on the rating remains negative.

On 24 August 2015, Uralkali's Board of Directors approved a share buyback programme worth up to $1.32 billion, a second this year, which will be executed by mid-October and funded with available cash reserves and external debt. Despite the company's healthy profitability and cash flow generation, supported by the rouble devaluation, and material cash reserves, the programme is viewed by Moody's as credit negative, as it will reduce Uralkali's financial flexibility and slow down its deleveraging efforts amid a prolonged weakening of potash markets.

Uralkali noted that the programme is aimed at enhancing shareholder returns at a time when there is a lack of new investment opportunities and given the technical limitations on dividend distributions. The tender offer enables it to repurchase up to 14% of share capital worth $1.32 billion ($16 per Global Depository Receipt (GDR) and $3.2 per common share). In the event of a further decrease in the free float of GDRs on the London Stock Exchange (LSE), the board may consider delisting of the GDRs from the LSE, which is no longer considered a strategic priority for the company. In its press release the company stated that potential delisting will not be accompanied by a further share repurchase.

The transaction is expected to be funded with new borrowings from Russian state banks in the amount of up to $800 million and the remaining to be funded with the existing cash balance. Depending on the RUB/USD exchange rate, Moody's believes this could result in Uralkali's adjusted leverage (total debt/EBITDA) increasing to around 3.5x by FYE 2015 from about 3.1x as of June 2015, although Moody's would expect this metric to fall to below 3x by FYE 2016 with scheduled debt reductions and growth in profits. This remains higher than Moody's guidance for the rating, although in our view it is mitigated at this time by the company's high cash balance of $2.5 billion as of June 2015 and the expectation that Uralkali will retain substantial cash reserves in the medium term. On a pro-forma basis for the share buyback, Moody's expects that adjusted net leverage (net debt/EBITDA) will range between 2.1x -- 2.5x during 2015-16 versus 1.8x for 2014.

While the programme will slow the deleveraging that had been factored into the current rating and negative outlook, Uralkali's Ba1 credit profile remains supported by the company's very strong business fundamentals, namely (1) the leading market position in the global potash market, and (2) the cost leadership position, which is strengthened by the rouble depreciation as the company generates about 86% of its revenues from exports while more than 80% of operating costs and capital expenditures are rouble denominated. The rating is also supported by strong liquidity, in the form of material cash cushion, continued robust cash flow generation and access to funding. The company continues to maintain its own leverage target (net debt/EBITDA of 2.0x) which it anticipates to get close to by end 2016.

The negative outlook on the rating reflects the fact that metrics are expected to remain weak for the current rating at least until 2016, with very limited headroom for further shareholder returns, following $2.4 billion in share buybacks that are expected to be completed this year. The rating is likely to be downgraded if there are signs of weakening liquidity or lack of progress towards deleveraging. Any further creditor-unfriendly corporate actions or changes in financial policy will also put negative pressure on the rating.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Ekaterina Botvinova
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Limited, Russian Branch
7th floor, Four Winds Plaza
21 1st Tverskaya-Yamskaya St.
Moscow 125047
Russia

Victoria Maisuradze
Associate Managing Director
Corporate Finance Group

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Moody's: Uralkali's $1.32 billion share buyback programme is credit negative but no immediate impact on the rating
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