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Rating Action:

Moody's affirms Yara's Baa2 ratings; stable outlook

17 Aug 2018

London, 17 August 2018 -- Moody's Investors Service, ("Moody's") today affirmed the Baa2 issuer rating of Yara International ASA ("Yara" or "the company") and its baseline credit assessment (BCA) of baa2. At the same time, Moody's affirmed the Baa2 ratings assigned to Yara's senior unsecured notes. The outlook on all ratings is stable.

RATINGS RATIONALE

The rating affirmation reflects the fact that Yara's Baa2 rating is underpinned by the significant scale and high degree of integration of its operations, its leading position in the nitrogen fertilizer markets, both as a producer and a distributor, and its global footprint, albeit with a more limited presence in North America. This is tempered by the relatively high cyclicality of the fertiliser industry, as well as Yara's high exposure to energy and agricultural commodity markets.

In the context of its integrated business model, Moody's views Yara's strong distribution capabilities as a stabilising factor that outweighs their dilutive effect on EBITDA margin. The focus of Yara's product offering on premium-priced complex fertilisers (such as NPK) also helps mitigate its inherent exposure to the cyclicality affecting the global nitrogen fertiliser sector.

With urea prices still under pressure in supply-driven markets and Moody's adjusted capex projected to peak around $1.7 billion as various growth projects get completed, Moody's expects Yara to generate negative free cash flow after capex and dividends (FCF) of around $700 million in 2018. Combined with the acquisition of Tata Chemicals Limited (Ba1 stable)'s urea business in India and the Vale Cubatão Fertilizantes complex in Brazil for an aggregate consideration of $655 million, this will leave Yara's adjusted credit metrics at the weak end of our guidance for the Baa2, with total debt to EBITDA close to 3.0x and retained cash flow (RCF) to total debt in the low twenties in percentage terms. This leaves Yara's metrics more weakly positioned than in recent years but with a broader business profile, supporting the Baa2 rating and stable outlook.

Looking to 2019, Moody's expects that gains accruing from efficiency improvement initiatives and a first full-year contribution from the acquisitions and seven plant expansions due to come on stream in 2018, will support a recovery in Yara's operating profitability under a range of price scenarios. Combined with reduced investments and the maintenance of a prudent shareholder distribution policy, this should allow Yara to be broadly FCF neutral in 2019 and restore headroom within its credit metrics relative to our rating guidance.

Given its 36% ownership by the Norwegian government, Yara falls within the scope of Moody's rating methodology for government-related issuers (GRIs). Under this methodology, Moody's assumes Low dependence, considering Yara's broadly diversified international operations and modest financial and operational links between Yara and the government. Furthermore, Moody's assumption of Low support from the Government of Norway reflects (i) the absence of guarantees or formal obligations on behalf of the Norwegian government to support Yara's obligations; (ii) the government's track record of supporting capital raising, jointly with other shareholders; (iii) no precedent of direct government intervention; and (iv) the relative importance of Yara to the domestic economy. While recent steps to broaden Yara's international profile diversify and strengthen its standalone credit quality, they further reduce its domestic concentration within Norway. Based on our assumptions of Low dependence and Low support, the Baa2 ratings do not currently incorporate any uplift from the baa2 BCA.

The stable outlook reflects Moody's expectation that contributions from efficiency initiatives and the start-up of growth projects will support the recovery in Yara's cash flow and credit metrics within the next eighteen months.

WHAT COULD CHANGE THE RATING UP/DOWN

While unlikely at this juncture considering recent pressure on operating profitability and the higher leverage resulting from a period of sustained investments, a rating upgrade could be considered should a sustained upturn in operating profitability and cash flow lead to a permanent reduction in financial leverage allowing total debt to EBITDA to be sustainably around 1.5x and RCF to total debt to rise in the high thirties throughout the cycle.

Conversely, the Baa2 rating would come under pressure should Yara experience a more severe and prolonged deterioration in operating results and cash flow generation and/or embark upon a more aggressive acquisitive strategy, leading to some pronounced weakness in credit metrics, including debt to EBITDA rising above 3x and RCF to total debt falling into the low twenties in percentage terms for an extended period of time.

The methodologies used in these ratings were Chemical Industry published in January 2018, and Government Related Issuers, published in June 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Headquartered in Oslo, Norway, Yara International ASA is a global leader in the production, distribution and sale of nitrogen-based fertilizers and related industrial products. In the year to June 2018, the group reported revenue of $11.9 billion and EBITDA of $1.3 billion.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Francois Lauras
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Anke N Richter, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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