Jan 30 - Fitch Ratings has assigned OJSC PhosAgro (PhosAgro) a Long-term foreign currency Issuer Default Rating (IDR) of 'BB+'. The Outlook is Stable. Fitch has simultaneously assigned Phosagro Bond Funding Limited's proposed issue of loan participation notes (the Notes, LPNs) an expected foreign currency senior unsecured rating of 'BB+(EXP)'.
Fitch will assign the Notes a final rating upon receipt of final documentation materially conforming to the information reviewed.
A full list of ratings is at the end of this release.
- LPNs Not Subordinated
The transaction is structured in the form of a loan from the issuer, Phosagro Bond Funding Limited, an Ireland-based private limited liability company established for this sole purpose, to the borrower, OJSC PhosAgro, pursuant to the terms of a loan agreement. Operating companies, OJSC Apatit, Balakovo Mineral Fertilisers LLC and OJSC PhosAgro-Cherepovets, will provide irrevocable and unconditional guarantees in respect of the obligations of PhosAgro under the loan.
- Strong Market Position
PhosAgro, with the annual output of more than 3.6m tonnes of DAP/MAP and overall fertilizer, feed phosphate and technical phosphate capacity over 6.2m tonnes is the second largest global producer of phosphate fertilisers behind MOS Holdings Inc (Mosaic; 'BBB'/Positive). PhosAgro's sales structure by regions is diversified with the focus on the Russian/CIS, European and Asian markets.
- Self-Sufficiency in Raw Materials
The company owns phosphate rock deposits with more than 2bn tonnes of high-quality resources according to the JORC Code which provides comfortably long mine life of around 75 years based on current extraction volumes. The company also owns ammonia production facilities which cover more than 90% of its internal requirements. In Fitch's view, in the longer term the concentrated supply structure of phosphate rock and the depletion of phosphate rock deposits held by some producers will provide greater pricing power to the remaining phosphate rock producers given the relatively inelastic and increasing demand for phosphates.
- Competitive Cost Position
PhosAgro's vertically integrated business model with access to local low-cost feedstock contributes to a low operating costs position compared to its competitors. PhosAgro, along with other Russian corporates does however face the potential for natural gas prices to increase in the coming years at a higher rate than general inflation. This may negatively affect the company's margins, although Fitch notes that the company may be able to partially offset this with improvements in gas consumption efficiency at its ammonia plants.
- Conservative Capital Structure
The company's capital structure is conservative with funds from operations (FFO) adjusted net leverage of 0.64x at end-2011 and expected by Fitch to be 0.70x at end-2012. Forecasted negative free cash flow in FY2013-2014 will contribute to the increase of FFO adjusted net leverage to 0.9x by end-2013 and to 1.1x by end-2014. Nevertheless leverage levels will remain moderate and are a key support for the company's ratings.
- Country Risk
PhosAgro has limited geographic diversification with all the company's assets being located in Russia. In Fitch's view, this exposure entails higher-than average political, business and regulatory risks.
RATING SENSITIVITY GUIDANCE:
Positive: Future developments that could lead to positive rating actions include:
- FFO adjusted net leverage below 1.5x
- Proven track record of good corporate governance practices
Negative: Future developments that could lead to negative rating action include:
- FFO adjusted net leverage sustainably above 2.5x
- EBITDAR margin sustainably below 20%
FULL LIST OF RATING ACTIONS:
Foreign currency Long-term IDR: assigned at 'BB+'; Outlook Stable
Foreign currency Short-term IDR: assigned at 'B';
Foreign currency senior unsecured rating: assigned at 'BB+';
Local currency Long-term IDR: assigned at 'BB+'; Outlook Stable
Local currency senior unsecured rating: assigned at 'BB+';
National Long-term rating: assigned at 'AA(rus)'; Outlook Stable
Phosagro Bond Funding Limited:
Expected foreign currency senior unsecured rating on the proposed Loan Participation Notes: 'BB+(EXP)'