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
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same series, category/class of debt, security or pursuant
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provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
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Exceptions to this approach exist for the following disclosures,
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to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated
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These ratings are solicited. Please refer to Moody's Policy
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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
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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
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