Fitch Affirms EuroChem at 'BB'; Outlook Revised to Negative
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15.09.09 10:54
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The rating action reflects Fitch's view that Eurochem's financial profile does not provide much headroom for a further deterioration in market conditions, or for additional spending outside its planned investment programme.
The sharp drop in global fertiliser prices and demand from the record highs of Q308 caused EuroChem's sales to decline by 34.7% y-o-y to RUB36.5bn in H109, whilst its EBITDA margin declined to 18.6% from 43.2% a year earlier. Funds from operations (FFO) fell 60.8% to RUB6.8bn. At the same time, net debt increased to RUB41.1bn from RUB2.3bn as of September 30 2008, mostly due to an aggressive investment strategy against the weak economic backdrop. The group secured a USD1.5bn (RUB43.5bn) four-year pre-export finance facility (PXF) in September 2008, the bulk of which was used to acquire RUB31.2bn worth of shares (12.51%) in German potash and salts producer K+S AG (K+S) between October 2008 and April 2009. Cash flow from operations (CFO) was RUB11.3bn in the nine months to June 30 2009, against capex of RUB13.1bn. With limited visibility on the near term fertilizer outlook, monthly amortisations of USD35m (RUB1.1bn) under the PXF facility and an estimated RUB44bn to be spent on its potash project between 2009 and 2012, with peak spending in 2010 and 2011, Fitch believes that EuroChem's financial metrics and financial flexibility could come under pressure in the next 12-18 months.
EuroChem's net debt/LTM EBITDA increased to 1.6x at June 30 2009 from 0.1x at September 30 2008. Fitch forecasts net leverage at 2.5-3.0x for FY09 based on expectations of a moderate recovery in fertilizer demand in Q309 on the back of seasonal and lag effects. However, the agency stresses that its forecast does not factor in any cash inflow from the possible sale of some of EuroChem's shares in K+S, which are currently valued at around EUR740m or 64% of gross debt, and offer some flexibility to restore net leverage below covenant levels on the PXF facilities and Eurobonds should they come under pressure. Covenant compliance is therefore not an immediate concern. Liquidity is considered adequate with cash balances of RUB11.1bn at June 30 2009 and unused bank facilities of around USD550m (RUB17.1bn). Fitch understands that EuroChem is in the process of securing long-term financing for its capex programme, with ECA-backed (Export Credit Agency) funding under consideration.
The agency forecasts a gradual reduction in net leverage to 2012, based on growth in operating earnings as demand recovers and ongoing projects (melamine, granulated urea, CAN) come fully onstream. Unannounced and material debt-funded spending resulting in further pressure on leverage, or a protracted downturn in the fertiliser market with operating performance sustained around H109 levels, could result in a negative rating action.
EuroChem's ratings continue to be supported by its leading market positions in the growing Russian fertiliser sector, strong product and market diversification, its strategic focus on productivity gains and vertical integration, and positive cash flow generation - aided in FY09 by working capital relief. Fitch also takes a positive view on EuroChem's progress towards expansion into potash as it should enhance the company's business risk profile in the long-term, with diversification away from nitrogen fertilisers and natural gas price volatility post market-deregulation. Fitch sees supply-driven risk in the medium term in nitrogen fertilizers, with new capacity in the Middle East and Asia likely to put pressure on prices after 2010. The agency also notes that other potash greenfield projects announced in Russia are still in the initial stages of feasibility studies.
While Fitch believes that strong agricultural drivers will support the medium- to long-term demand fundamentals of the fertiliser sector, some uncertainties remain in the near term, in particular with regards to the timing and pace of the economic recovery, the effect of reduced fertilizer consumption on crop yields in 2009/10, the level of inventories in the distribution pipeline, and potentially durable changes in farmers' fertiliser usage as a result of the downturn, with a return to under-utilisation of phosphate and potash fertilisers. Market participants estimate that the economic and financial crisis has effectively removed two years of growth from the fertilizer sector with the level of consumption of 2007 expected to be reached in 2011, provided that a recovery occurs in 2010.
Contacts: Myriam Affri, London, Tel: +44 (0) 20 7682 7145; Eldar Aghayev, +44 (0) 20 7682 7336.
Media Relations: Julian Dennison, London, Tel: +44 020 7682 7480, Email: julian.dennison@fitchratings.com; Peter Fitzpatrick, London, Tel: + 44 (0)20 7417 4364, Email: peter.fitzpatrick@fitchratings.com.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
"Dow Jones", 07.09.2009