The credit rating of JSC “MCC “EuroChem” (hereinafter, JSC “MCC “EuroChem”, or the Company) is based on its strong business profile, very strong geographic diversification, very high corporate governance, very large size, very high profitability, coverage and liquidity indicators, as well as low leverage and a high cash flow assessment.
JSC “MCC “EuroChem” is the main production unit of EuroChem Group (hereinafter, the Group, EuroChem Group, or EuroChem). Given the fact that the Company accounts for most of the assets and cash flow of EuroChem Group, ACRA used the Group’s consolidated indicators to assess the Company’s creditworthiness. EuroChem Group is one of the four largest global fertilizer producers. The Group produces nitrogen, phosphate, potash and complex fertilizers, and operates in the iron ore concentrate and organic synthesis product supply segment.
key assessment factors
2022 forecast. The energy crisis and the pressure of sanctions on Russian and Belarusian fertilizer producers led to prices peaking at historic levels in fertilizer markets in the first half of this year. In the aforementioned period, urea prices (FOB Yuzhny) increased by 30% vs. the average for 2021 (which was already high by historic standards), MAP (FOB Baltic Sea) — by 54%, and potassium chloride (FOB Baltic Sea, spot) — by 104%. A slow price correction has been observed since Q3, and ACRA expects average annual prices of urea and MAP to grow by around 27% compared to 2021 and the price potassium chloride at to grow by 100% by the end of 2022. The Agency expects average prices for fertilizers in 2023–2024 to remain above the cyclical average.
ACRA expects volumes of sales to decline within the range of 10–15% in physical terms in 2022 due to problems with loading the Company’s production capacities in Europe, and also on the back of changes to supply logistics. At the same time, the decrease in supply volumes in physical terms will be more than offset by higher prices for the Group’s products.
Low leverage and very high debt service assessment. When calculating leverage indicators, ACRA adjusted the size of debt for the size of project debt. According to ACRA’s assessment, weighted average adjusted total debt to FFO before net interest payments for 2019 to 2024 will amount to 1.6x, which corresponds to low leverage.
The Group’s high coverage of interest payments stems from the relatively low effective interest rate for foreign currency debt. The Group increased the size of its ruble borrowings in 2019–2021; however, interest payments on ruble debt were almost fully hedged in dollars until 2022. This year, the Company had to drop its practice of foreign currency hedging. In addition, over the next few years, JSC “MCC “EuroChem” plans to repay a significant part of its foreign currency debt. Together, these factors lead to a higher effective interest rate on the Company’s debt, however, this growth will be mitigated by the smaller size of debt. The weighted average ratio of FFO before net interest payments to interest payments for the period from 2019 to 2024 is estimated by ACRA at 10.5x.
High cash flow assessment. ACRA adjusted capital expenses by the size of project financing when calculating cash flow indicators. ACRA estimates weighted average free cash flow (FCF) profitability for the period from 2019 to 2024 at 13.7% taking into account the adjustment, while the weighted average ratio of capital expenditures to revenues will be 11.8%. The Group has not paid dividends since 2016 and adheres to a strategy of reinvesting FCF in current investment projects. In ACRA’s opinion, the favorable market situation will lead to a considerable increase of FCF in 2022–2024. The growth of FCF will also be facilitated by the reduction of the Company’s capital expenditures associated with the postponement of the implementation of individual projects. The Agency expects FCF to be directed toward lowering leverage, while the Company itself will continue to adhere to a zero-dividend policy in the forthcoming years.
KEY ASSUMPTIONS
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Average annual prices increasing in 2022 compared to 2021 (urea by 27%, MAP by 27%, and potassium chloride by 100%), followed by prices falling by 30–40% in 2024;
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No dividend payments in 2022–2024;
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Average annual USD/RUB exchange rate of 68 in 2022, followed by the ruble weakening to 75 rubles to the dollar by 2024;
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Introduction of export duties for fertilizers from 2023;
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Capital investment program carried out according to the Group’s plans.
POTENTIAL OUTLOOK OR RATING CHANGE FACTORS
The Stable outlook assumes that the rating will highly likely stay unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
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Weighted average ratio of total debt to FFO before net interest payments falling below 1x;
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Further strengthening of the Group’s market positions.
A negative rating action may be prompted by:
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Weighted average ratio of total debt to FFO before net interest payments exceeding 2x coupled with weighted average FFO ratio before net interest payments to interest payments declining below 10x;
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Weighted average FFO margin before net interest payments and taxes and weighted average FCF margin falling below 30% and 5%, respectively.
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Significant negatives changes to taxation of the industry.
RATING COMPONENTS
Standalone creditworthiness assessment (SCA): aa+.
Adjustments: none.
ISSUE RATINGS
JSC “MCC “EuroChem”, series BO-001P-04 (RU000A100LS3), maturity date: January 18, 2023, issue volume: RUB 10 bln — AA+(RU).
JSC “MCC “EuroChem”, series BO-001P-05 (RU000A100LV7), maturity date: July 19, 2023, issue volume: RUB 10 bln — AA+(RU).
JSC “MCC “EuroChem”, series BO-001P-06 (RU000A100RG5), maturity date: August 18, 2023, issue volume: RUB 13 bln — AA+(RU).
JSC “MCC “EuroChem”, series BO-001P-07 (RU000A101L96), maturity date: April 10, 2025, issue volume: RUB 10 bln — AA+(RU).
JSC “MCC “EuroChem”, series BO-001P-08 (RU000A101LJ0), maturity date: April 15, 2025, issue volume: RUB 25 bln — AA+(RU).
Rationale. The issues represent senior unsecured debt of JSC “MCC “EuroChem”. Due to the absence of either structural or contractual subordination of the issues, ACRA regards them as pari passu to other existing and future unsecured and unsubordinated debt obligations of the Company. According to ACRA’s methodology, the credit ratings of the issues are equivalent to that of JSC “MCC “EuroChem”, i.e. AA+(RU).
regulatory disclosure
The credit ratings have been assigned to JSC “MCC “EuroChem” and the bond issues (RU000A100LS3, RU000A100LV7, RU000A100RG5, RU000A101L96, RU000A101LJ0) under the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Non-Financial Corporations under the National Scale for the Russian Federation and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities. The Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments on the National Scale for the Russian Federation was also applied to assign credit ratings to the above issues.
The credit rating of JSC “MCC “EuroChem” and the credit ratings of the bond issues (RU000A100LS3, RU000A100LV7, RU000A100RG5, RU000A101L96, RU000A101LJ0) were published by ACRA for the first time on December 1, 2020 and December 4, 2020, respectively. The credit rating and its outlook and the credit ratings of the bond issues (RU000A100LS3, RU000A100LV7, RU000A100RG5, RU000A101L96, RU000A101LJ0) are expected to be revised within one year following the publication date of this press release.
The credit ratings were assigned based on data provided by EuroChem Group and JSC “MCC “EuroChem”, information from publicly available sources, and ACRA’s own databases. The credit ratings are solicited, and EuroChem Group and JSC “MCC “EuroChem” participated in their assignment.
In assigning the credit ratings, ACRA used only information, the quality and reliability of which were, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.
ACRA provided no additional services to EuroChem Group and JSC “MCC “EuroChem”. No conflicts of interest were discovered in the course of credit rating assignment.
