London, 13 June 2018 -- Moody's Investors Service has today assigned a Ba2 Corporate Family
Rating (CFR) and Ba2-PD Probability of Default Rating (PDR) to
EuroChem Group AG (EuroChem), a Switzerland-domiciled fertilizer
business with major assets in Russia.
The ratings outlook is stable.
EuroChem's Ba2 CFR primarily balances its large scale, diversification
and cost competitiveness with an elevated Moody's-adjusted
leverage and the execution risks related to its new potash capacity,
which heighten the company's exposure to the fertilizer industry's
cycles.
RATINGS RATIONALE
EuroChem's Ba2 CFR primarily reflects (1) the company's strong
business profile, underpinned by its large scale of operations,
diversified product mix, and established positions in the global
and regional fertilizer markets; (2) sustainable cost competitiveness,
which supports relatively high margins, additionally helped by the
weakness of the rouble; (3) potential for deleveraging; and
(4) proved access to long-term external funding, including
a shareholder loan facility, which support liquidity.
At the same time, the CFR is constrained by (1) EuroChem's
elevated Moody's adjusted leverage, driven by significant
investments in potash and ammonia projects; (2) susceptibility to
the current weakness and cyclicality of the global fertilizer market,
which is heightened by the company's pronounced exposure to more
volatile nitrogen fertilizers; (3) execution risks associated with
the ramp-up of its recently launched new potash facilities and
their payback in line with the company's plan; and (4) exposure
to Russia's macroeconomic, regulatory and operating environment,
including the rouble's volatility, given that the majority
of its assets are in Russia.
Having commissioned its new potash facilities, EuroChem has added
potash to its fertilizer product mix and is now among the few global producers
of all three types of fertilizers.
However, until the first-stage potash facilities are fully
ramped-up by 2021, the company's product mix will primarily
consist of nitrogen and phosphate fertilizers as well as complex fertilizers,
which all together accounted for 70% of its $4.9
million sales in 2017. The company's focus is premium complex
fertilizers, which support its revenue and margins.
EuroChem's fertilizer sales on a value basis are mainly split between
Europe (32%), Russia (20%, including iron ore
concentrate as a by-product), Latin America (17%)
and North America (12%). It is estimated to be among the
top five global producers in the nitrogen and DAP/MAP segments by capacity.
EuroChem's well-invested production facilities in Russia,
Belgium and Lithuania are well located to serve its markets, the
key of which are high-demand Europe and Russia, where it
has strong market positions. Its developed distribution and logistics
networks facilitate the diversification of its market coverage.
EuroChem's strong market presence is driven by its cost competitiveness,
underpinned by its vertically integrated business model, which assumes
a high degree of self-sufficiency in key raw materials and access
to low-cost natural gas supplies in Russia.
The weakness of the rouble additionally supports the company's low
cost base. Overall, its costs are comfortably in the second
quartile of global cost curves for nitrogen fertilizers and phosphates,
and are expected to be even better positioned on the potash cost curve.
Based on its low-cost position and sizable operations, EuroChem
has demonstrated sustainably strong margins through the cycle, though
the weakness of fertilizer markets and some appreciation in the rouble
resulted in a reduction of EBITDA margins to 22.8% in 2017
compared to 29.3% in 2016.
Moreover, EuroChem is focused on increasing its self-sufficiency
in raw materials as well as its business scale and market positions overall.
For this purpose, it is implementing three investment projects,
including two potash projects valued at $7 billion in total and
an ammonia project at $1 billion.
The potash projects have opened the company's path into the potash
market and will build up its self-sufficiency in this product in
the future. The ammonia project will make it fully self-sufficient
in this product from the end of 2018.
The ambitious investments have made EuroChem's free cash flow generation
turn increasingly negative and its financial profile has become highly
leveraged, as measured by Moody's adjusted debt/EBITDA of
4.7x at the end of March 2018 (including project finance funding
for the potash projects and the shareholder loan).
A sustained weakening in fertilizer prices -- coinciding with the
rouble appreciation -- may jeopardise EuroChem's plan to deleverage
as would put pressure on EBITDA and margins. Moreover, the
ongoing weakness of the fertilizer markets may also cause delays in the
ramp-up of its potash projects and their paybacks, additionally
pressuring its financial profile.
That said, Moody's sees fertilizer prices as having bottomed
out, though they are likely to remain under pressure from overcapacity
and low crop prices through 2019. However, demand for fertilizers
is projected to grow, albeit at a low rate.
Moody's expects EuroChem to be able to increase its EBITDA on the
back of limited price improvements, modestly increasing volumes
and margins, turn to free cash flow positive, and deleverage
towards a Moody's adjusted debt/EBITDA of 3.5x over the next
12-18 months on a sustained basis.
This expectation factors in EuroChem's product and market diversification,
established market position, and cost competitiveness, as
well as the projected absence of a sustained and significant appreciation
in the rouble.
The expectation also considers that the company's investment program
peaked in 2017 and that its internal financial policy target is set at
net debt/EBITDA of 1.5x-2.5x (excluding project finance
funding and the shareholder loan) through the fertilizer market cycle.
Furthermore, no dividend payments are expected until the ramp-up
of its potash projects has progressed significantly.
Moody's views EuroChem's liquidity as adequate, assuming
that the company will maintain access to long-term external funding
and continue to proactively address its liquidity needs. At the
end of March 2018, its liquidity needs for the next 12 months,
including debt maturities of $0.9 billion and total capex
of $1.3 billion (both maintenance and project-based),
were sufficiently covered by cash reserves of $287 million,
projected cash flow and availabilities under long-term committed
facilities of $1.2 billion.
Moody's understands that the company is about to sign new sizable
long-term facilities with several foreign banks. With these
facilities factored in, liquidity over the next 18 months will be
addressed.
Moody's positively notes that EuroChem has a contractual loan agreement
with its majority shareholder, which allows it to attract up to
$1 billion of a perpetual zero-interest loan to support
its liquidity.
RATING OUTLOOK
The stable outlook reflects Moody's expectation that EuroChem's
strong market position and cost competitiveness will allow it to deleverage
towards adjusted debt/EBITDA of 3.5x and support a healthy liquidity
profile in the next 12-18 months.
WHAT COULD CHANGE THE RATING UP/DOWN
Upward pressure on the rating could develop if adjusted debt/EBITDA decreases
towards 3x and retained cash flow (RCF)/debt (Moody's-adjusted)
increases towards 20% on a sustained basis.
The rating could come under pressure, if (1) EuroChem fails to deleverage
below adjusted debt/EBITDA of 4.0x in line with its plans;
and/or (2) the company's liquidity profile materially deteriorates.
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
EuroChem Group AG is a Switzerland-domiciled fertilizer business
with its major production assets in Russia. It also has assets
in Belgium, Lithuania and Kazakhstan. The company is one
of the leading producers of nitrogen and phosphate fertilizer globally,
and recently commissioned new potash capacity in Russia. It also
produces iron ore concentrate as a by-product and industrial products.
EuroChem has a wide distribution and logistics network and sells its products
to 10,000 customers in 100 countries. In the 12 months ended
March 2018, it generated revenue of $4.9 billion and
EBITDA of $1.1 billion (adjusted by Moody's).
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
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rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
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for additional regulatory disclosures for each credit rating.
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
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Victoria Maisuradze
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
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