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Rating Action:

Moody's assigns a Ba2 CFR to OCI N.V.; outlook stable

09 Apr 2018

London, 09 April 2018 -- Moody's Investors Service, (Moody's) has today assigned a Ba2 Corporate Family Rating (CFR) and Ba2-PD Probability of Default Rating (PDR) to OCI N.V. (OCI or the company). Concurrently, Moody's has assigned a B1 rating to OCI's proposed issuance of $1 billion (equivalent) senior secured notes due 2023. The outlook on all ratings is stable.

RATINGS RATIONALE

The Ba2 CFR assigned to OCI N.V. (OCI) reflects the scale of its operations and the diversity of its business portfolio in terms of products, geographies and end-markets. In 2017, the group generated revenues of $2.25 billion and adjusted EBITDA of $483 million. Following the completion of its growth projects in 2018, its eight production facilities will have a total run-rate capacity (including 50% of Natgasoline) in excess of 13.4 million metric tons (Mt) in 2019, which will be evenly balanced between the US (39%), North Africa (33%) and Europe (28%). OCI will hold global leading positions in several of its markets, ranking fourth in nitrogen fertilisers, fifth in methanol and first in melamine worldwide.

The group's product portfolio will be split approximately 60/40 by capacity and 50/50 by sales between nitrogen fertilisers and industrial chemicals, with no single product contributing more than approximately 25% of its total capacity. This geographical and end-market diversification helps mitigate the seasonality characterising the nitrogen fertiliser business, which generates the majority of its revenues and profits from sales to farmers.

OCI's productive assets are favourably located to serve high demand regions, such as the US Midwest and North West Europe, and benefit from proximity to customers supported by a global distribution network and shipping infrastructure.

While OCI has sizeable businesses in North Africa, which entails a certain degree of political risk exposure, Moody's notes that the share of production capacity located in Egypt and Algeria will fall to about 33% upon completion of OCI's growth projects (v. 52% in 2016). Also, the sales originated from North Africa are predominantly destined to export markets and denominated in U.S. dollars, the currency in which natural gas costs are also incurred. Only approximately 5% of sales are made domestically in Egyptian pounds and Algerian dinars.

Having implemented a capex programme in excess of $5 billion since 2010, OCI boasts an efficient, well invested asset base and flexible production profile. At the same time, it is significantly exposed to the price of natural gas, which is the principal raw material and fuel used to produce nitrogen fertiliser and industrial chemical products, and accounted for 50% of its $1.6 billion total cost of sales (excluding depreciation and amortization) in 2017. However, Moody's notes that OCI's North Africa- and US-based operations benefit from access to low cost feedstock, underpinned by competitive long-term gas supply contracts in North Africa (circ. 50% of all gas purchases) and the attractive economics of shale gas in the US. As a result, OCI's plants in these regions are positioned in the first quartile of their respective global industry cost curves.

OCI's financial results are inherently vulnerable to the cyclicality affecting the nitrogen-based fertiliser, methanol and melamine sectors. In recent years, these markets were affected by pronounced supply-demand imbalances largely driven by significant capacity additions in the US and the Middle East. This resulted in low global operating rates and significant downward pressure on prices.

However, after reaching multi-year lows in the summer of 2017, nitrogen fertiliser prices recently bounced back, supported by lower urea exports from China amid higher coal prices and limited natural gas feedstock availability. Methanol markets have also recently shown signs of recovering, as China-based methanol-to-olefin MTO facilities, which represent about 15% of global methanol demand, have been operating at higher rates.

While longer term the main downside risk to the current more favourable outlook remains that capacity be added at an aggressive pace over time in the natural gas-rich regions of the world, OCI's exposure to nitrogen and methanol industry cycles is mitigated by sound demand fundamentals. Growth in the consumption of urea and other nitrogen fertilisers should continue to be driven by population growth, urbanisation resulting in lower arable land and GDP growth, as well as demand for industrial end uses such diesel exhaust fluid (DEF). At the same time, demand growth for methanol should be largely driven by its increasing use in fuel applications and gas blending as well as the continuing addition of MTO/MTP (methanol-to-propylene) plants in China.

In spite of returning to positive free cash flow generation during 2017, OCI exhibited very high leverage at the end of 2017, with total debt to EBITDA of 9.8x (as adjusted by Moody's). This reflected the effect of the substantial capex programme undertaken by the group in recent years, at a time when its operating profitability came under pressure owing to severely depressed pricing conditions in the global nitrogen and methanol markets, as well as several operational issues experienced by the group's North Africa-based facilities. In the period 2014-2016, cumulative capex of $3.1 billion (on a Moody's adjusted basis) combined with weak average operating cash flow of $550 million p.a., had led OCI to report a cumulative negative free cash flow after capex and dividends (paid only to minority shareholders during the period) of $1.65 billion.

However, Moody's expects that OCI will benefit from significant volume growth in the near to medium term, as production from recently added capacities ramps up amid the ongoing recovery in nitrogen fertiliser and methanol prices. In addition to the continuing ramp-up of production at IFCo, as well as the start-up of Natgasoline in Q2 2018 and BioMCN's M2 plant in November 2018, OCI's volumes and financial results should benefit from improved utilisation rates at Sorfert post last year's repair work, while production in Egypt should be supported by a much improved gas supply situation following significant gas discoveries.

Moody's forecasts that OCI will grow sales volumes of own products at a low double-digit annual rate in the next three years on average, with revenues in a range of $3.0-$3.3 billion. Once all the group's growth projects are operational, Moody's believes that OCI will have the capacity to generate annual EBITDA of around $1.2 billion under mid-cycle conditions. Assuming OCI keeps capital expenditure within a range of $100-200 million p.a. from 2019, while refraining to pay out any cash dividend to shareholders, Moody's expects that the group will generate substantial positive free cash flow after capex and dividends (FCF) under a range of operating profit outcomes. This should enable it to reduce debt in a timely manner and bring leverage in line with the Ba2 CFR, including Moody's adjusted total debt to EBITDA close to 4.0x by the end of 2018.

Moody's considers OCI's liquidity as good. Following completion of the refinancing transaction, we expect the company to have $66 million of cash on the balance sheet and availabilities of $270 million under its $700 million revolving credit facility (RCF) due 2021 with two extension options of one year each. The terms and conditions governing OCI's RCF include two maintenance financial covenants due to be tested semi-annually, including total net leverage and EBITDA interest cover, under which Moody's expects the company to have sufficient headroom.

Moody's notes that the group's cash flow profile is influenced by the seasonality of the nitrogen fertiliser business. Its working capital requirements are typically the highest just prior to the start of the northern hemisphere spring planting season. However, Moody's forecasts that OCI will generate positive free cash flow on an annual basis. In addition, some of OCI's operating subsidiaries such as OCI Partners LP, the majority owner of OCI Beaumont LLC (B2 stable) and EFC, have access to additional sources of liquidity under revolving credit facilities maintained locally. Altogether, OCI should have sufficient liquidity to meet debt maturities of just under $500 million in 2018-2019, $413 million of which are outstanding at the operating subsidiaries' level.

The two-notch differential between the CFR of OCI, which is the ultimate holding company of the group, and the B1 rating assigned to the senior secured notes (SSN) to be issued by OCI reflects: 1) the structural subordination of OCI's creditors to those of its US and North African operating subsidiaries, whose financial debt is largely secured against these companies' respective assets; and 2) the relatively weak guarantor package supporting OCI's SSN. The Dutch operating companies, which directly guarantee the notes and bank debt of OCI NV accounted for only 36% of EBITDA in 2017, a percentage that would decline to around 20% in coming years in the absence of any further refinancing shifting debt towards OCI, the group's ultimate holding company.

In addition, the SSN holders benefit from guarantees provided by other intermediate holding companies such as OCI Intermediate B.V., OCI Fertilizer International B.V., OCI Chemicals B.V. and OCI Fertilizers B.V., which are the indirect owners of the US and North Africa-based operating subsidiaries. However, the guarantee obligations of these intermediate holding companies are structurally subordinated to the creditors of their respective operating subsidiaries.

RATING OUTLOOK

The stable outlook reflects Moody's expectation that following the completion of major growth projects, OCI will generate FCF on a sustainable basis and use it on priority to deleverage its balance sheet so that it is able to bring Moody's adjusted total debt to EBITDA towards 4.0x by the end of 2018, and maintain it close to this level under mid-cycle conditions.

WHAT COULD CHANGE THE RATINGS UP/DOWN

While unlikely in the near term, some upward pressure on the rating may develop over time should OCI significantly strengthen its capital structure and demonstrate its ability to consistently generate positive free cash flow through the cycle so that it positions its Moody's adjusted total debt to EBITDA and retained cash flow to net debt metrics sustainably below 3.0x and above 20% under mid-cycle conditions.

The Ba2 CFR could however come under pressure should OCI fail to (i) ramp up production in line with management's current guidance and materially increase free cash flow generation and (ii) reduce debt such that adjusted total debt to EBITDA rises materially above 4.0x for any prolonged period of time under mid-cycle conditions.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Chemical Industry published in January 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

Headquartered in the Netherlands, OCI N.V. is a leading global producer and distributor of natural gas-based fertilisers and industrial chemicals, selling products to agricultural and industrial customers in 57 different countries around the world. In 2017, OCI reported EBITDA of $479 million on revenue of $2.25 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.
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