New York, March 18, 2011 -- Moody's Investors Service assigned a Prime-2 commercial paper rating
to Potash Corporation of Saskatchewan Inc. (PCS). Moody's
also affirmed PCS's Baa1 senior unsecured ratings. The rating outlook
Potash Corporation of Saskatchewan Inc. (PCS) is establishing a
$1.5 billion 4(2) commercial paper program (rated Prime-2)
that, in conjunction with its existing long-standing Canadian
program, has an aggregate principal limit of $1.5
billion. The proceeds from the proposed commercial paper program
will be used for general corporate purposes. Potash's $1.5
billion commercial paper program is expected to be fully backed by the
company's $2.5 billion revolving credit facility,
which matures in December 2012. At December 31, 2010,
the credit facility had no outstandings under the revolver.
PCS's good liquidity reflects the company's consistent cash flow
and marketable securities tempered by its planned capital expenditures
and the prospect of share repurchase activity, which may increase
if cash balances increase over time. Moody's expects Potash's
free cash flow to be positive in fiscal 2011. PCS's largest
revolver of $2.5 billion is more than sufficient to cover
expected commercial paper usage. PCS's remaining facilities
are expected to be used, if needed, for investment spending
and share repurchase activity.
The Prime-2 rating also reflects Moody's expectation that PCS will
refinance the existing revolver by the end of 2011. The revolver
allows for same day "swingline" availability of up to $255
million and Moody's expects PCS to manage the combined maximum daily
CP maturities under its US and Canadian CP programs such that the maximum
daily swingline availability of $255 million will not be exceeded.
The total amount of the $2.5 billion can be borrowed with
one day notice.
The $2.5 billion facility contains no material adverse change
(MAC) representation at time of borrowing but does have an environmental
and litigation MAC representation at each borrowing. The financial
covenants include a total leverage of less than 3.5 times before
provincial taxes, a debt to capital of no more than 60% and
a tangible net worth test of $1.25 billion - all
with good headroom. Moody's estimate of the leverage test at fiscal
yearend 2010 was approximately 1.2 times.
"The Baa1 rating and positive outlook incorporates our positive view on
future global fertilizer demand in 2011 and beyond and the expectation
that the company will continue to participate in future profitable global
growth in the fertilizer industry," said Moody's analyst Bill Reed.
The following summarizes the ratings activity:
Potash Corporation of Saskatchewan, Inc.
Long Term Rating at Baa1
7.750% senior unsecured notes due May 31, 2011 at
4.875% senior unsecured notes due March 1, 2013 at
5.250% senior unsecured notes due May 15, 2014 at
3.750% senior unsecured notes due September 30, 2015
3.250% senior unsecured notes due December 1, 2017
6.500% senior unsecured notes due May 15, 2019 at
4.875% senior unsecured notes due March 30, 2020 at
5.875% senior unsecured notes due December 1, 2036
5.625% senior unsecured notes due December 1, 2040
Outlook affirmed at positive.
The Baa1 rating reflects PCS's historically strong bondholder protection
measurements, its leading cost positions, and strong market
positions in all three primary commodity fertilizers. The ratings
also reflect the company's sizable free cash flow of $936 million
over the year ending December 31, 2010, even after material
increases in capital spending. During the 2010 fiscal year PCS
increased capital spending to a level of $2.0 billion versus
$1.2 billion for the full year 2008. This level of
free cash flow ($936 million), even after substantial increases
in capital spending, reflects an unprecedented improvement in the
historic operating/pricing environment, albeit down significantly
from the peak spot prices seen in 2008.
In addition, the ratings reflect the company's currently strong
financial profile which has shown significant improvements over the last
24 months. PCS's strong future financial performance is predicated
on the recovery of potash demand and expectations of robust long-term
performance in its key potash fertilizer markets; potash constitutes
46% and 70% of the company's LTM December 31, 2010
sales and gross margin respectively. While most of 2009 fiscal
year experienced potash industry sales volumes well below historic norms
as demand fell, 2010 reflected a resurgence in demand as global
grain demand remained high, grain prices rose, and the global
economic picture stabilized.
The 2009 weak demand was due largely to the global recession in which
constraints to liquidity and concerns about economic recovery resulted
in farmers choosing to mine the fields for nutrients (an unsustainable
strategy). More recently with rising crop prices and the meaningful
decline in yields, farmers have aggressively purchased fertilizer
for seasonal applications. Hence, in 2010 fertilizer sales
volumes returned and are expected to further improve in 2011.
PCS 's positive outlook reflects the consistently strong financial metrics
achieved as a result of the long-term favorable market dynamics
balanced by the significant capital expenditures over the next few years.
The outlook also incorporates management's expressed interest in furthering
their global investments in potash supplies through acquisition and additional
investment as well as the possibility that management may revisit additional
shareholder enhancement strategies but structuring them in keeping with
credit metrics that support a potentially higher rating.
Upward movement in the rating will be driven by a sustainable improvement
in financial performance that should allow for meaningful free cash flow
generation despite elevated capital expenditures over the next two years.
We would look for conservative financial policies concerning shareholder
enhancement programs, normalized volume and working capital levels,
as well as relative stability in the global economy prior to considering
a ratings upgrade. We would also expect management, in the
event of another downturn, to use the cash generated by contracting
working capital to reduce debt and actively manage its balance sheet debt
levels. Specifically, we expect to see debt/EBITDA to remain
sustainably within a range of 1.5x to 2.3x.
The rating or outlook could be negatively pressured as a result of the
pursuit of material debt-financed acquisitions, aggressive
debt financed shareholder enhancement activities, materially negative
changes to the cash flow and debt metrics, or weaker than anticipated
Moody's most recent announcement concerning the ratings for PCS was on
November 19, 2010 when the Baa1 rating was affirmed and the outlook
was moved to positive.
The principal methodology used in this rating was Global Chemical Industry
rating methodology published in December 2009.
Headquartered in Saskatoon, Saskatchewan, Canada, Potash
Corporation of Saskatchewan Inc. is the world's largest fertilizer
producer, manufacturing all three primary commodity fertilizers
- nitrogen, phosphate, and, most significantly,
potash. Potash Corporation reported US $6.0 billion
in sales for the year ending December 31, 2010.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Service information, and confidential and proprietary Moody's
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VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's assigns Prime-2 rating to Potash's commercial paper program
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