Fitch Affirms Eurochem Group AG at 'BB'; Outlook Negative

(The following statement was released by the rating agency) MOSCOW, September 20 (Fitch) Fitch Ratings has affirmed Swiss-based holding company Eurochem Group AG's (EuroChem) and Russia-based JSC MCC EuroChem's Long-Term Issuer Default Ratings (IDR) at 'BB'. The Outlook on both ratings is Negative. A full list of rating actions is available below. The Negative Outlook is driven by our expectation that the company's leverage will remain well above Fitch's negative rating guidelines in 2016-17 before gradually moderating to a level more commensurate with the current rating level. Higher leverage is largely due to the company implementing capex for its potash and ammonia projects at a time of low fertiliser prices. However, the company's completion risks under these projects have reduced over the past year, which mitigates the temporary deterioration of projected credit metrics and supports the rating affirmation. We expect EuroChem to comply with its financial covenants (net debt/EBITDA below 3x), which at 30 June 2016 remained at 2.4x. Headroom is limited but remains manageable as the company will, in case of need, reduce its covenanted debt through more loans from the shareholder or working capital optimisation, such as receivables factoring. Unless the company manages to receive substantial shareholder loans with equity-like features, its leverage is likely to come under additional pressure and may prompt a downgrade. EuroChem is Russia's large fertiliser producer with robust diversification across products. Its business profile will be further enhanced by upcoming potash projects, which are forecast to come on stream from late 2017 to 2018 and be within the first quartile of the global potash cost curve. KEY RATING DRIVERS Leverage under Pressure from Capex Management is committed to the VolgaKaliy and Usolskiy potash projects, which aim to commence operations in late 2017 to early 2018, targeting at 2.3mtpa of potash capacity each once they ramp up during the next several years. These are estimated to have a first-quartile position on the global potash cost curve, will more than cover EuroChem's internal potash needs and provide it with diversification into all three major nutrients (nitrogen, phosphates and potash). EuroChem's high capital intensity and low fertiliser prices are pushing the company's leverage above our negative rating action triggers. We expect the company's fund from operations (FFO)-adjusted net leverage to exceed 4x in 2016, before gradually declining to 3.5x in 2018 and to just below 3x by 2019. This is worse than our expectations behind our previous rating action in January 2016 (2.8x in 2016; 3.1x in 2018), mainly on lower projected fertiliser prices. However, the company's improving business profile, to an extent, offsets the higher debt burden. Low Prices Hit 2016 Results In 1H16 EuroChem's reported EBITDA fell 26% to USD586m, as realised fertiliser prices fell 30% yoy. To some extent lower prices were offset by the rouble weakening by 18% over the same period, as the company's costs are predominantly rouble-pegged. We expect EuroChem's EBITDA to be around USD1bn in 2016 (-29% yoy), before increasing to USD1.2bn in 2018 and USD1.5bn in 2019 on the start-up and ramp-up of its new potash projects, and aided by fertiliser price recovery in the single-digits. Strong Business Fundamentals EuroChem has a strong presence in European and CIS fertiliser markets (58% of 2015 sales) and ranks as the seventh-largest fertiliser player by total nutrient capacity in EMEA. EuroChem's Russian-based self-sufficient nitrogen and phosphate production assets have moved to the first quartile of the global cash cost curves following the recent depreciation of the rouble. The company has access to the premium European compound fertiliser market with its own production capacities in Antwerp (Belgium), trademarks and distribution network. This, as well as strong EBITDA margins of around 30%, gives EuroChem a rating of 'BBB-', before typically applying the two-notch corporate governance discount to Russian corporates that results in the current 'BB'. Weak Fertiliser Pricing Pricing across all nutrients came under pressure during 2015-16 and is being impacted by cheaper gas and energy, high fertiliser stocks, weak demand on the back of a low grain price environment, and new capacity entering the markets. Fitch forecasts this weak pricing environment will remain over the next three years with potash being the last to see a recovery, in turn placing pressure on earnings of EuroChem and its forthcoming projects. Rouble depreciation has, however, helped maintain margins as revenues are dollar-denominated while costs are mainly rouble-linked. Project Financing Facilities Consolidated EuroChem has successfully procured project financing for its Usolskiy Potash project and its Baltic ammonia project. Even though the financing is specific to the projects and has non-recourse features that separate it from EuroChem's other outstanding debt, Fitch continues to consolidate the projects and the financing within EuroChem's overall leverage metrics. This is due to the strategic importance of the projects to the company's future operational profile and the inclusion of a cross default clause within the group's financing agreements. If the projects were de-consolidated, EuroChem's projected leverage would be lower, at 3.4x in 2016, and falling to around 2x by 2018-19. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Fertiliser prices to fall 25%-35% in 2016, with nitrogen and phosphate fertilisers recovering in single-digit levels from 2017 and potash remaining flat over the next two years; - Post-2016 sales volumes up, starting from 2018-2019 as Baltic ammonia and potash capacities commence and ramp up; - USD/RUB to rise towards 57 in 2019 from 69 in 2016; - Capex/sales to peak at around 30% in 2016-2017 before normalising towards nearly 20%; - No dividends over the next three years. RATING SENSITIVITIES Positive: Future developments that may, individually or collectively, lead to positive rating action include: - Successful completion of one of the ongoing potash projects resulting in an enhanced operational profile, coupled with FFO adjusted net leverage falling below 3x. In case the projects are delayed and the company's business profile does not improve, we expect EuroChem to maintain its FFO adjusted net leverage at below 2.5x through the cycle to be in line with the 'BB' rating; Negative: Future developments that may, individually or collectively, lead to negative rating action include: - Continued aggressive capex or shareholder distributions translating into FFO adjusted net leverage not trending towards 3x (assuming enhanced business profile as evidenced by the start-up of at least one potash project), or towards 2.5x (assuming project delays and lack of further business diversification) by 2019 - Protracted pricing pressure or double-digit cost inflation in 2016 leading to an EBITDAR margin being sustained below 20% (2016E: 28%) LIQUIDITY Liquidity Manageable At end-1H16, EuroChem's cash and short-term deposits (USD326m), and committed credit lines (around USD320m) were not enough to cover short-term debt, including derivatives (USD853m). In addition, we expect EuroChem to generate negative free cash flow in 2016-17, which are, however, fully covered by EuroChem's further utilisation of committed project finance facilities. Despite tightened liquidity we see the refinancing risk as manageable as the company has a number of options to finance the liquidity gap, such as raising a subordinated shareholder loan (up to USD1bn is available according to the framework facility agreement signed with AIM Capital SE in September 2016), accessing Russian banks that continue to be supportive of large corporate borrowers, or issuing bonds. Limited Subordination Risk We expect EuroChem's ratio of prior-ranking debt (including bank debt guaranteed by operating subsidiaries, secured debt and, potentially, factored receivables)-to-EBITDA to fall to below 2.2x by end-2016 and well below 2x by end-2017 from the current peak of 2.3x. This will be driven by project financing debt substituting maturing prior-ranking debt and alongside EBITDA growth. We normally consider notching down the senior unsecured rating relative to the IDR when the ratio of prior-ranking debt to EBITDA exceeds 2x-2.5x. We do not notch down EuroChem's senior unsecured rating at present, based on our projection of a falling share of prior-ranking debt in its capital structure. However, we may consider subordination in future if the capital structure does not change in line with our expectations. FULL LIST OF RATING ACTIONS JSC MCC EuroChem: Long-Term Foreign and Local Currency IDRs: affirmed at 'BB'; Outlook Negative National Long-Term Rating: affirmed at 'AA-(rus)'; Outlook Negative Short-Term Foreign Currency IDR: affirmed at 'B' Local currency senior unsecured rating (domestic bonds): affirmed at 'BB' National long-term unsecured rating (domestic bonds): affirmed at 'AA-(rus)' EuroChem Group AG: Long-Term Foreign Currency IDR: affirmed at 'BB'; Outlook Negative EuroChem Global Investments Limited: Foreign currency senior unsecured rating on loan participation notes: affirmed at 'BB' Contact: Principal Analyst Dmitry Marinchenko, ACCA Associate Director +44 20 3530 1056 Supervisory Analyst Dmitri Kazakov, CFA Associate Director +7 495 956 9901 Fitch Ratings Moscow Valovaya Street, 26 Moscow Committee Chairperson Nikolai Lukashevich, CFA Senior Director +7 495 956 9968 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: julia.belskayavontell@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be secondary. Applicable Criteria Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1011922 Solicitation Status here Endorsement Policy here ail=31 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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