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Rating Action:

Moody's assigns Baa1 rating to SQM's up to $500 million proposed notes; stable outlook

13 Jan 2020

New York, January 13, 2020 -- Moody's Investors Service, ("Moody's") has assigned a Baa1 rating to Sociedad Química y Minera de Chile S.A.'s ("SQM") up to $500 million proposed senior unsecured notes. The outlook is stable.

Net proceeds from the proposed issuance will be primarily used for liability management and other general corporate purposes, including funding the company's capital spending program.

The rating of the proposed notes assumes that the final transaction documents will not be materially different from draft legal documentation reviewed by Moody's to date and assume that these agreements are legally valid, binding and enforceable.

Rating assigned:

Issuer: Sociedad Química y Minera de Chile S.A.

- Up to $500 million Senior Unsecured Notes: Baa1

RATINGS RATIONALE

SQM's Baa1 ratings are supported by the company's sound market position in the lithium, iodine, potassium nitrate and thermos-solar salts markets, with significant cost advantages relative to industry peers as a result of its access to rich natural resources in northern Chile. SQM benefits from a broad universe of industries and customers for its products, which are sold globally for diverse applications such as plant nutrition, X-ray contrast media, pharmaceuticals, LCD polarizing film, batteries and alternative energy. SQM's strong liquidity position also support its Baa1 rating. The company's narrow commodity product line, relatively small size and high dividend payout policy in 2015-19, are also incorporated into the rating.

SQM's ratings also consider the company's significant lithium production capacity expansion in Chile and Australia due in 2021-23. SQM is undertaking a project in Chile to take lithium carbonate production capacity to 120,000 MT/year by 2021, with an additional 40,000 MT/year by 2023, up from 70,000 MT today. This project includes a whole new production facility and its construction will not interfere with the existing capacity installed. In addition, the new plant will meet the highest quality standards and requirements from battery technology industry. Furthermore, SQM's is also undertaking a project to expand lithium hydroxide capacity, now working on the first of two new plants of 8,000 MT/year capacity, that will increase SQM's 13,500 MT/year capacity today. In addition, SQM's 50% working interest in the Mount Holland lithium hydroxide project in Australia will contribute with additional 22,500 MT (45,000 MT total) of annual capacity expected by around 2021.

Capital spending requirements have risen considerably for SQM since 2018 as the company embarked in large projects, mainly for its lithium business. In this sense, SQM has a total budget of around $2.1 billion for 2019-2023 capital spending, $1.3 billion for lithium operations in Chile and Australia and approximately $800 million for caliche ore operations (mainly iodine and fertilizers).

The funds from the proposed notes issuance will be used for liability management and to support funding of SQM's capital expenditures in Chile, but the company aims to finance its capital spending program mostly with its own cash generation. Additional cash sources could derive from a lowering of SQM´s dividend distributions —100% pay-out ratio in the last few years — or capital contributions, although the company has made no announcements in this regard and we do not incorporate any such scenario in our projections for the company. SQM's dividend policy is approved every year by the Board of Directors.

SQM´s free cash flow has turned negative since the start of the company's ambitious capital spending program in 2018, and will likely remain so at least until 2021, because most of the new capacity in lithium related projects is due in the second half of 2021. Additionally, we expect SQM's credit metrics to weaken slightly in 2020 as a result of a fall in the company's EBITDA stemming from lower lithium prices, but higher sales volumes from its brine operations —lithium and potassium products— and solar salts, together with better prices for iodine products, will partially compensate the fall. However, SQM´s good liquidity profile, with $1.2 billion in cash and marketable securities as of September 30, 2019, and the absence of significant debt maturities until 2023 ($385 million), will support SQM´s cash requirements until the new capacity comes on line in 2021. Additionally, the company´s projects in lithium are carried out in separate modules, which provides SQM´s flexibility over the timing of the disbursing of capital spending if market conditions change.

Overall, we expect EBITDA as adjusted by Moody's to lower to around $640 million in 2020, down from $670 expected in 2019, before recovering to around $750 million in 2021. Pro forma for the new issuance, we expect Moody's adjusted debt to EBITDA ratio to rise to around to 2.9x by year-end 2020, up from 2.6x as of year-end 2019, before lowering to around 2.4x in 2021. Our projections incorporate a scenario of lower lithium prices during 2020-21 ($7,800/MT average for SQM´s lithium segment, down from $9,956/MT as of the third-quarter of 2019), so the company could deleverage faster if lithium prices recover or stabilize at higher levels than those incorporated in our projections.

The stable outlook of SQM's Baa1 ratings is supported by the company's strong liquidity profile and our expectation that the company will continue to generate elevated cash flow from operations to support capital spending derived from the expected capacity expansions in Chile in the coming years.

The ratings could be upgraded if the company were to (1) materially increase its size; (2) expand its product profile such that it has stable cash flow generation across industry and economic cycles; and (3) maintain strong credit metrics, with Moody's-adjusted debt/EBITDA below 1.0x, EBIT/interest expense higher than 15.0x and retained cash flow/debt above 30%.

The rating could be downgraded if SQM's operations, size or profitability is consistently and materially hurt in any way. A deterioration in its liquidity or credit profile, such as debt/EBITDA above 2.5x on a sustained basis, could also lead to a downgrade.

Headquartered in Santiago, Chile, Sociedad Quimica y Minera de Chile S.A. produces fertilizers, iodine and its derivatives, lithium and its derivatives, and industrial chemicals. SQM's production assets are located in the northern part of Chile, but the company sells mainly to export markets, and boasts large world market shares in its specialty plant nutrition, iodine and lithium product lines. SQM reported revenues of $2.0 billion for the last twelve months ended September 2019.

The principal methodology used in this rating was Chemical Industry published in March 2019. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

Martina Gallardo Barreyro
VP-Senior Analyst
Corporate Finance Group
Moody's Latin America ACR
Ing. Butty 240
16th Floor
Buenos Aires City C1001AFB
Argentina
JOURNALISTS: 1 800 666 3506
Client Service: 1 212 553 1653

Marianna Waltz, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 0 800 891 2518
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
© 2021 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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