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Rating Action:

Moody's changes Uralkali's outlook to stable and affirms Ba2 CFR

30 Oct 2020

London, 30 October 2020 -- Moody's Investors Service (Moody's) has today affirmed the Ba2 corporate family rating (CFR) and Ba2-PD probability of default rating (PDR) of Uralkali PJSC (Uralkali), one of the few largest potash producers globally. Concurrently, Moody's has affirmed the Ba2 senior unsecured bond rating of Uralkali Finance Designated Activity Company. The outlook on both entities has been changed to stable from positive.

RATINGS RATIONALE

Today's rating action reflects the reversed trend for improvement in Uralkali's credit metrics with the company's adjusted debt/EBITDA going back up to 4.2x as of the 12 months that ended June 2020 from 3.5x in 2019 mostly as a result of weaker revenue and EBITDA generation driven by the trough in the potash market in the first half of 2020, but also the company's intention to proceed with a sizeable investment programme and shareholder distributions.

Following the strong 2018, the potash pricing environment started to soften again in 2019 on the back of suppressed demand as a result of severe floods in North America and weak palm oil prices in Southeast Asia. Despite the recovery in potash consumption amid more favourable weather conditions and improved farmers' economics, coupled with limited impact of the coronavirus pandemic on the fertiliser industry given its strategic importance and stable food demand, a major downward price correction continued into H1 2020 driven by the material oversupply built up in the previous year.

Although strong demand across the key sales regions allowed Uralkali to raise its sales volume by around 14% in H1 2020, it only partly offset a 25% drop in the average potash sales price and the respective increase in sales and distribution costs further pressured the company's profitability. One of the lowest cost base in the industry, tight cost control, and the weaker rouble, however, helped the company to preserve its adjusted EBITDA margin at a fairly healthy 43%.

While improving market fundamentals, underpinned by the sound demand and gradual reduction in global inventories, should support marginally higher potash prices in H2 2020 and through 2021, subject to normal weather conditions, their recovery pace will likely remain subdued due to the lack of strict supply discipline among the leading producers. Therefore, although Uralkali's adjusted profitability will remain comfortably above 40% in 2020-21, it will stay materially below 56% posted in 2019, when it benefited from favourable potash pricing.

As a result of weaker earnings, which will unlikely recover to the levels of 2018-19, Moody's expects the company's adjusted debt/EBITDA to stay at around 4.0x in 2020 with limited prospects for deleveraging in the next 12-18 months to below 3.0x and within its recently announced internal medium term comfortable leverage target of between 2.0x and 2.5x unadjusted net debt/EBITDA.

Uralkali's capacity to reduce the absolute debt level will also be constrained by rising investments into strategically important expansion projects. The company, however, retains flexibility to adjust its capital spending, in case a material pressure on its financial profile starts to evolve. In addition, there remain persisting risks related to shareholder distributions in various forms. In particular, substantial loans that Uralkali will likely continue to provide to its shareholders (or their affiliates) will further curb its capacity to reduce debt. At the same time, Moody's expects the company to pursue a fairly balanced approach to any potential payouts, to be largely covered by its positive free cash flow.

Along with Uralkali's strong cash flow generation, its liquidity will remain supported by the company's established access to long-term funding. While in 2020 Uralkali's leverage will stay above the threshold of 3.5x reported net debt/EBITDA embedded in its $500 million eurobond (3.6x as of the 12 months that ended June 2020), it is an incurrence covenant thus will not limit the company's ability to procure new debt for refinancing purposes. Moody's also expects Uralkali to comply with maintenance covenants set at 4.0x reported net debt/EBITDA under most of its bank loans (comprise around 70% of the company's total debt as of 30 September 2020), although the headroom will be somewhat limited in 2020. The company's strong relationship with lenders provides additional comfort that it will receive all the necessary waivers, if needed.

Uralkali's Ba2 rating continues to positively reflect its sustainable position as one of the leading low cost potash producers globally with strong profitability and cash flow generation. At the same time, Uralkali's rating remains constrained by its (1) susceptibility to the cyclical global fertilizer market; (2) single commodity (potash) concentration, with exposure to potash price volatility, along with the inherent environmental and mining risks; and (3) concentrated ownership structure, which elevates corporate governance risks.

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 the 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. Uralkali is also required to backfill cavities that result from mining activities to liquidate the adverse effect of its operations and accidents. Overall, as of June 2020, the company's total provisions for filling cavities and mine flooding were at around $339.3 million and $9.9 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. While Uralkali's focus on deleveraging thereafter was reconfirmed by its new financial policy announced in 2019, there is no track record of the company consistently adhering to its conservative leverage target. The company also continues to issue substantial shareholder loans (around $743 million was outstanding as of 30 June 2020). The risk of concentrated ownership is, however, partly mitigated through the oversight of four independent directors out of the total ten in the board of directors as well as leverage covenants in the debt documentation.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The stable outlook reflects Moody's expectation that Uralkali's strong market position and high cost competitiveness will allow it to preserve its adjusted debt/EBITDA at or below 4.0x and support liquidity in the next 12-18 months.

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 build a track record of prudent and predictable shareholder distributions.

Moody's could downgrade the rating if potash prices weakened materially or Uralkali's increased tolerance to higher leverage led 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 us separately.

The principal methodology used in these ratings was Chemical Industry published in March 2019 and available at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1152388. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in the Berezniki Perm region of Russia, Uralkali is one of the few largest potash producers by capacity globally. Around 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 that ended June 2020, Uralkali generated revenue and adjusted EBITDA of around $2.6 billion and $1.2 billion, respectively. Following the cancellation of quasi-treasury shares, representing around 56% of the company's issued capital, in June 2020, 46.37% is held by Uralchem JSC and 53.6% by Rinsoco Trading Co. Limited, which are ultimately controlled by Dmitry Mazepin and Dmitry Lobiak, respectively.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

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:
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JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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