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April 25 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned Moroccan fertiliser producer OCP S.A.'s (OCP) USD1.25bn 5.625% notes due 2024 and USD300m 6.875% notes due 2044 final 'BBB-' ratings.
The notes are rated at the same level as OCP's senior unsecured debt rating as they represent direct, unconditional, unsecured and unsubordinated obligations of the company and will rank pari passu will all existing and future senior unsecured and unsubordinated obligations of the issuer. Covenants include a negative pledge with permitted liens. Events of defaults include cross default to any debt of the borrower, or its material subsidiaries with a USD25m threshold. For certain events of default, a threshold of 5% in aggregate of notes then outstanding is required to call an event of default. The notes are also subject to a change of control clause.
Proceeds are being used to fund OCP's capital expenditure programme and for general corporate purposes. The final ratings are in line with the expected ratings assigned on 3 April 2014 and follow the review of the final bond documentation which conformed to the drafts previously received.
OCP's ratings reflect its vertical integration, competitive cost position, exceptionally large ore reserves, and its leading market positions in phosphoric acid and phosphate rock. The ratings also capture the progress to date on OCP's transformational expansion strategy, which should translate in the near term into material cost savings, capacity increases and enhanced product diversification and production flexibility.
Constraints include the group's exposure to the phosphate fertiliser cycle; in particular investment spending is peaking at a time when market conditions are softening. Given its 94% state ownership and strategic importance for the Moroccan economy, OCP's IDR cannot be higher than Morocco's Country Ceiling of 'BBB'.
The Stable Outlook reflects our view that the group has sufficient flexibility to maintain credit metrics commensurate with its ratings through to 2016, despite volatile pricing conditions and its high investment requirements.
KEY RATING DRIVERS
Moderate Rebound from 2013 Trough
Our base rating case assumes a marginal pricing improvement on the 2013 averages for phosphate products. Prices have increased so far in 2014, driven by strong demand from Brazil, stock building ahead of the planting season and supply disruptions in the Middle-East and North Africa. Low demand from India and exports from China remain key potential downside risks. While visibility on India's 2014/15 fertiliser subsidy remains clouded by its economic downturn, we assume a moderate rebound from 2013 levels given depleted phosphate stocks in the country. Chinese exports could disrupt the market in 2H14, particularly after a reduction in the phosphates export tariffs.
Pipeline to Enhance Cost Position
Our 2014 base case incorporates the commissioning of the 234km slurry pipeline that links OCP's Khourigba phosphate rock mine to the processing hub of Jorf Lasfar. Construction works have been completed and the pipeline is under trial runs. With an annual capacity of up to 35 million tonnes (mt), it should considerably reduce requirements for energy, water, and road and rail transportation.
We forecast an improvement in profitability in 2014, reflecting the enhanced cost base and, to a lesser extent, higher capacity utilisation rates and lower raw material costs. Under our base case, EBITDA margin is projected to increase to and remain above 30% from 2014 onwards, from 23% in 2013. Given its near-term positive effect on the group's cost position, we regard the successful launch of the pipeline as a key rating driver.
Progress on Transformational Capex Programme
In our view, the execution risk associated with the 2008-2016 phase of OCP's investment programme (including the slurry pipeline) has reduced materially with the progress made to date. The expansion of the mines (open pit) and beneficiation plants will yield a 5mt increase in annual phosphate rock production capacity to 35.1mt by 2016. At Jorf Lafsar, OCP has built two granulation plants with an annual aggregate capacity of 1.7mt and is completing four identical fully integrated fertiliser production units of 1mt each to be commissioned starting 2014 and through to 2016. In parallel, Jorf Lasfar's port infrastructure and storage facilities are also being expanded.
Leverage Increases on High Capex
OCP's fund from operations (FFO) gross and net adjusted leverage increased to 3.5x and 2.7x respectively at end-2013, from 1.5x and 0.8x. This is slightly above the upper limit for the current ratings and reflects record investment levels (MAD21bn) and poor market conditions in 2013. Under our base case, net leverage is sustained within the expected range at 2.0x-2.5x over 2014-2016.
This assumes annual capex being sustained at an average of MAD22bn (partly debt-funded), which in our view can be scaled back in the event of a downturn. This also assumes a gradual improvement in operating cash flow generation primarily on the back of the cost efficiencies and new capacity.
At end-2013, OCP had cash and cash equivalent reserves of MAD6bn against short- term debt of MAD5.9bn. Liquidity was also supported by long-term committed unused facilities totalling MAD7.7bn. The company also had short-term investment (tenors above 90 days) of MAD4.6bn. Under our base case, free cash flow (FCF) is expected to remain negative due to the high capex levels and we assume that OCP will continue to access the domestic and international bank and debt capital markets for its investment and refinancing needs. Other cash requirements include contributions to its private pension plan and dividend payments, which we believe can be tailored to match fluctuations in the group's cash flow generation.
Exposure to Cyclicality and Volatility
OCP is less diversified across nutrients than some of its competitors and its ratings are constrained by its exposure to the phosphate fertilisers cycle. While demographic growth and reduced arable land support long-term demand fundamentals for fertilisers, volatility in both pricing and demand is high and dictated by factors outside of producers' control. Erratic demand patterns from key consumers (e.g. India), adverse weather conditions or capacity additions can translate into material declines in cash flow generation. In mitigation, improvements in cost position, production flexibility and arbitrage options should afford OCP an increasing degree of flexibility during market downturns.
Despite its 94% state-ownership, OCP's ratings are not linked to that of Morocco (BBB-/Stable). We have assessed the operating and legal ties under Fitch's Parent and Subsidiary Rating Linkage methodology and regard them as weak. We view the group's ongoing transformation and strategic focus as evidence of an independently run profit-oriented business model with little influence from the state. Nevertheless, given OCP's strategic importance for the Moroccan economy, negative pressure on the sovereign's rating may have implications for OCP and would lead us to review the government's stance towards the group. Any resulting adverse changes to the credit standing of OCP could lead to a negative rating action.
Key Man Risk
The departure of Mr Mostafa Terrab, OCP's CEO and Chairman, and resulting succession risk could put pressure on the ratings. Although we recognise the high calibre and experience of the senior management team, Mr Terrab's vision and influence are critical to the successful execution of OCP's expansion strategy.
Positive: Although not envisaged over the next one to two years, future developments that could lead to positive rating action include:
- Successful completion of the expansion programme with fundamental improvements in OCP's resilience to phosphate cyclicality
- Net FFO net adjusted leverage sustained below 1.5x; and
- Positive FCF generation through the cycle
Negative: Future developments that could lead to negative rating action include:
- EBITDA margins dropping below 15% (FY13: 23%) and/or FFO net leverage sustained above 2.5x indicating fundamental trends contrary to the base rating case
- Departure of Mr Terrab and resulting succession risk
- Pressure on Morrocco's ratings (BBB/Stable) accompanied by evidence of upstreaming or retention of cash (dividends, taxation) or strategic changes adverse to the credit standing of the group