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Rating Action:

Moody's changes Uralkali's outlook to positive and affirms Ba2 CFR; assigns Ba2 rating to the proposed notes

07 Oct 2019

London, 07 October 2019 -- Moody's Investors Service (Moody's) has today changed to positive from stable the outlook of Uralkali PJSC (Uralkali) and has affirmed the company's Ba2 corporate family rating (CFR) and Ba2-PD probability of default rating (PDR).

Concurrently Moody's has assigned a Ba2 senior unsecured rating to the proposed loan participation notes (LPNs) to be issued by Uralkali Finance Designated Activity Company (Uralkali Finance DAC) for the sole purpose of financing a loan to Uralkali. The outlook on Uralkali Finance DAC is positive.

RATINGS RATIONALE

RATIONALE FOR CHANGING THE OUTLOOK TO POSITIVE AND AFFIRMING Ba2 CFR AND Ba2-PD PDR

Today's change of Uralkali's outlook to positive and affirmation of its ratings primarily reflect the company's ongoing consistent deleveraging with its adjusted debt/EBITDA reducing to 3.2x in the 12 months ended June 2019 from 4.7x in 2017 and 5.8x in 2016 supported by its strong market position and high cost competitiveness and further reinforced by the recovery in the global potash market in 2018.

Moody's expects Uralkali's strong profitability and cash flow generation, coupled with softer but still fairly stable market conditions, to help the company continue deleveraging to 3.0x and below over the next 12-18 months including via reducing its debt level in absolute terms. The expectation factors in Uralkali's rising investments into expansion projects to be fully covered by strong internal cash flow, as well as a degree of flexibility, as reflected by the company's ability to adjust capital spending in line with market conditions and cash flow generation.

Despite the persisting risks related to shareholder distributions in various forms including substantial loans, Uralkali provides to its owners, Moody's expects Uralkali to pursue a fairly balanced approach to any potential payouts, with no material pressure on credit metrics and liquidity, and in line with a new more conservative financial policy.

Uralkali's Ba2 rating continues to positively reflect its (1) sustainable position as a leading global potash producer in the consolidated potash market; (2) high profitability, underpinned by the company's large mining reserves and low cost base; and (3) access to long-term bank and capital markets funding, which supports sound liquidity.

At the same time, Uralkali's rating is constrained by the company's (1) susceptibility to the cyclical global fertiliser market; (2) single commodity (potash) concentration, with exposure to potash price volatility, along with the inherent environmental and mining risks; and (3) exposure to corporate governance risks related to the concentrated ownership structure.

RATIONALE FOR ASSIGNING Ba2 RATING TO THE PROPOSED NOTES

The issuer of the notes - Uralkali Finance DAC - is a designated activity company incorporated under the laws of Ireland. The notes will be issued for the sole purpose of financing a loan to Uralkali, which is the main operating company and the ultimate parent company of the group. The notes will be secured by the charge on all amounts payable by Uralkali to Uralkali Finance DAC under the loan agreement between the two companies. Therefore, the noteholders will rely solely on the company's credit quality to service and repay the debt. The loan will be a senior unsecured obligation of Uralkali.

The Ba2 rating of the proposed notes is at the same level as Uralkali's corporate family rating, which reflects Moody's view that (1) the notes will rank pari passu with other unsecured and unsubordinated obligations of the company; and (2) the company has no secured debt in its capital structure.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) CONSIDERATIONS

As an owner and operator of mines, Uralkali remains exposed to the inherent environmental, social, and mining risks, which could involve additional costs and investments and decrease production capacity. Thus, flooding forced the company to close its Berezniki-1 mine in 2006, while a brine inflow accident at Solikamsk-2 in 2014 triggered gradual reduction in company's production capacity of the mine and development of the liquidation plan with the related repairs and remediation expenses to be completed in 2028 . According to the Russian law, Uralkali is also required to backfill cavities that result from its mining activities and incur additional social and environmental obligations to liquidate the adverse effect of its mining operations and accidents. Overall, as of June 2019, the company's total provisions for filling cavities and mine flooding stood at around $312.7 million and $11.6 million respectively.

Uralkali's fairly concentrated ownership structure involves higher corporate governance risks and lower visibility into the company's corporate actions in the longer term, which might negatively affect its credit profile. In particular, the share buybacks in 2015-17, which adversely coincided with falling potash prices, increased Uralkali's leverage to far above its at that time internal target of 2.0x unadjusted net debt/EBITDA, signaling the company's shift towards a more aggressive financial policy. At the same time, we note Uralkali's consistent focus on deleveraging thereafter. In addition, while the company continues to issue substantial shareholder loans, the payouts are made in line with its more balanced new financial policy. The risk of concentrated ownership is also partly mitigated through the oversight of four independent directors out of the total nine in the board of directors.

RATIONALE FOR THE POSITIVE OUTLOOK

The positive outlook reflects Uralkali's strong positioning within the current rating category and the possibility of an upgrade over the next 12-18 months.

WHAT COULD CHANGE THE RATINGS UP/DOWN

The rating could be upgraded if Uralkali were to (1) improve and sustain its adjusted debt/EBITDA below 3.0x and retained cash flow/debt above 15% across various price scenarios for potash; (2) continue reducing its absolute debt level, as planned; (3) preserve good liquidity; and (4) maintain a balanced approach to investment strategy and shareholder distributions with no material pressure on its financial metrics and liquidity.

Moody's could downgrade the rating if there was a material weakening of potash prices or Uralkali's increased tolerance to higher leverage lead to a substantial deterioration in its liquidity and financial performance, with debt/EBITDA materially exceeding 4.0x and retained cash flow/debt falling below 10%, on a sustained basis. Any exposure to potential event risk will be assessed by Moody's separately.

PRINCIPAL METHODOLOGY

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

COMPANY PROFILE

Headquartered in the Berezniki Perm region of Russia, Uralkali is one of the few largest potash producers by capacity globally. Approximately 80% of Uralkali's sales in terms of value is exported, mainly to Latin America, Southeast Asia, China, and India and Europe. For the 12 months ended June 2019, Uralkali generated revenue and adjusted EBITDA of around $2.9 billion and $1.6 billion, respectively. Following the share buybacks, quasi-treasury shares account for around 56% of the company's capital, while the two major shareholders, Uralchem JSC and Rinsoco Trading Co. Limited, hold around 20% each as of the end of September 2019.

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.

Ekaterina Lipatova
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

Releasing Office:
Moody's Investors Service Ltd.
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JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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