-- U.S.-based Compass Minerals International is looking to enter into a new $384 million term loan, plus estimated fees, with proceeds that we expect will be used to refinance existing maturities.
-- We are affirming our 'BB+' rating on Compass. We are assigning a 'BBB' issue-level rating and '1' recovery rating to the proposed term loan.
-- The stable rating outlook reflects our expectation that Compass will maintain good credit metrics for the 'BB+' rating despite recent operating challenges due to weather-related setbacks. Rating Action On May 11, 2012, Standard & Poor's Rating Services affirmed its 'BB+' corporate credit rating on Overland Park, Kan.-based Compass Minerals International. The rating outlook is stable. At the same time, we assigned our 'BBB' issue-level rating (two notches above the corporate credit rating) to the proposed $384 million term loan (plus estimated fees). The recovery rating is '1', indicating our expectation for very high (90% to 100%) recovery in the event of a payment default. We expect the company to use proceeds to repay its outstanding term loans due in 2012 and 2016. Rationale The ratings affirmation reflects our opinion that the company's 2012 earnings will support credit metrics in line with the 'BB+' rating, despite operating difficulties pressuring performance in both segments. Compass Minerals continues to struggle with weather-related setbacks in 2012 as demand for the highway deicing salt products declined 24% below historical averages during the October-March winter season following unseasonably warm weather in the company's regional end markets, which include the Great Lakes region and Ohio Valley. In addition, the company is also experiencing higher costs due to a weaker-than-expected sulfate of potash (SOP) harvest as a result of wet weather in 2011 and tornado damage at its Goderich, Ontario, salt mine and evaporation plant. Still, Compass' strong market position in both businesses continues to support the rating. Under our base case scenario, we expect the company's revenues to decline about 5% in 2012, with EBITDA between $250 million and $270 million, as annual volume declines of about 12% in the deicing salt segment are partially offset by approximately 25% volume growth in the potash segment. We expect that short-term margin pressures as a result of higher costs related to the tornado and potash harvest will hamper the company, and that it will right-size operating expenses in 2013, particularly given increased efficiencies expected from tornado-induced equipment upgrades and the completion of several components in Compass' ongoing expansion of the SOP production process. Despite lower earnings, we expect Compass will continue to maintain credit metrics at a level that we would consider to be good for the rating and our assessment of its 'significant' financial risk profile, with leverage trending comfortably below 2.5x and funds from operations (FFO) to debt of about 40%. The cost improvements are anticipated to translate into significant EBITDA growth in 2013, with leverage metrics below 2x and FFO to debt above 50%. Overland Park, Kan.-based Compass Minerals International is the largest producer of deicing rock salt and specialty fertilizer products in North America. The rating reflects our assessment of the company's "fair" business risk and "significant" financial risk. A few attributes we consider to be strengths, including the company's strong market position and that its product segments are uncorrelated, partially offsetting the risk factors. Compass is the largest North American producer of deicing salt and low-potassium potash, operates the world's largest rock salt mine, and has access to the only naturally occurring source of SOP in the region via the Great Salt Lake. This market position enhances its cost position and profitability. We expect the company's 2012 EBITDA margins to be about 24%, slightly below the historical five-year average of 27%. We expect margins to meet or exceed historical averages over the medium term. Compass generates revenues from two main segments, salt and specialty fertilizer. Its highway deicing business is seasonal with 70% of sales occurring between November and March. Demand is also highly dependent on weather as volumes can fluctuate significantly depending on the severity of the winter season. Although the company's volume is typically 10 million to 10.5 million tons in a normal winter season, volumes can swing by as much as 2 million tons either way depending on weather, which can have a material impact on earnings. Still, local governments are compelled to deice roadways because of safety concerns, resulting in non-cyclical demand characteristics. A key business risk is the company's high mine concentration as its Goderich salt mine in Ontario, Canada, accounts for about 65% of its salt production, and, as a result, operating performance is highly dependent on that mine's ongoing operation. Its specialty fertilizer segment produces and sells SOP to producers of high-value crops, including fruits, vegetables, and turfgrass. Earnings can fluctuate as a result of price volatility and cyclical demand, but we believe that long-term demand for specialty potash products is growing as developing nations continue to industrialize, which drives population growth and also reduces availability of arable land for agricultural products. Compass is in the midst of a multiyear expansion of its Great Salt Lake facility, an initiative that will expand its production capacity significantly over the next several years and that we expect will add additional financial stability to the company's overall earnings stream. Liquidity In our view, we expect Compass to maintain "adequate" liquidity. Our assessment of Compass's liquidity profile reflects the following:
-- Liquidity sources, including availability under its revolving credit facility, will exceed uses by 1.2x over the next year;
-- Liquidity sources will continue to exceed uses even if EBITDA were to decline by 20%; and
-- Compliance with financial maintenance covenants would likely survive a 20% drop in EBITDA without the company breaching covenant test measures. We expect pro forma liquidity to be about $300 million, consisting of balance sheet cash of about $184 million and availability of about $116 million under its $125 million revolving credit facility due 2015 (after accounting for letters of credit totaling about $9 million). Compass typically generates cash during the fourth and first quarters and consumes cash in the second and third quarters as it builds deicing salt inventories for the coming winter. Historically, the company has generated good FFO and cash flow from operations, but increasing levels of capital expenditures have recently thinned discretionary cash flow levels. In 2012, we estimate that the company will generate FFO of about $200 million and FOCF of about $10 million. Capital expenditures during the year should approximate $190 million, which consists of the continued expansion of specialty fertilizer production at the Great Salt Lake Facility, enhancements to the mining process at Goderich, and some tornado-related expenses, a portion of which we expect may be recouped via insurance. We expect dividends to be about $60 million in 2012, and that any additional shareholder rewards will not negatively impact the company's financial risk profile. We expect the proposed term loan to maintain maintenance financial covenants similar to Compass' existing loans, which require Compass to maintain a maximum leverage ratio of 4.5x and a minimum interest coverage ratio of 2.5x. Given our operating assumptions, we expect the company to remain in compliance with covenants over the near term. The company will have no near-term maturities in its capital structure following the completion of the proposed term loan financing. Recovery analysis For the complete recovery analysis, see our recovery report on Compass, to be published shortly following this report on RatingsDirect. Outlook Our stable rating outlook reflects the expectation that the company will maintain good credit metrics for the rating, with leverage below 2.5x and FFO to debt above 35%. Specifically, we expect adjusted EBITDA in a range from $250 million and $270 million for 2012, largely because of our expectation that growth in the potash segment will offset volume and pricing declines in the salt segment following unusually warm winter weather in the company's end markets. We could take a negative rating action if Compass's overall financial risk profile weakened significantly or if adjusted leverage were to rise above 3.5x and remain at this level. This could occur as a result of the combination of a substantial decline in volumes, a large debt-financed acquisition, or shareholder friendly initiative, such as a share repurchase. A positive rating action seems less likely in the near term given our view of the company's fair business risk profile as evidenced by the seasonality of its salt-production business, its high mine concentration, and the inherent cyclicality of its fertilizer business. However, a higher rating could occur over time if the company were able to further diversify its earnings stream away from dependence on seasonal salt sales and a single mine, while at the same time maintaining a financial risk profile in-line with an investment-grade rating. Related Criteria And Research
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Methodology And Assumptions On Risks In The Metals Industry, June 22, 2009
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009 Ratings List Ratings Affirmed Compass Minerals International Inc. Corporate Credit Rating BB+/Stable/-- Senior Secured BBB Recovery Rating 1 Senior Unsecured BB+ Recovery Rating 3 New Rating Compass Minerals International Inc. Senior Secured US$384 mil Term Loan D bank ln due 2017 BBB
Recovery Rating 1 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.