(The following statement was released by the rating agency)
Oct 10 - Fitch Ratings has affirmed JSC Acron's (Acron) Long-term foreign andlocal currency Issuer Default Ratings (IDR) at 'B+'. The Outlook on the Long-term IDRs isStable. The agency has simultaneously assigned an expected local currency senior unsecuredrating of 'B+(EXP)' and a Recovery Rating of 'RR4' to the group's new three-year RUB15bnexchange-traded rouble bond programme. A full list of rating actions is at the end of thiscommentary.
The affirmation reflects Fitch's view that Acron's financial profile continues to offersufficient headroom to withstand raw material cost inflation in Russia and expectedsupply-driven pricing pressure for its core products, and to support its capex plans over thenext two years.
The ratings also reflect the progress made on Acron's phosphate mining project, with thecommissioning of the Oleniy Ruchey mine in July and the planned launch of the ore processingoperations is in Q412. Production at the mine should ramp up to 1mtpa of apatite concentrateduring 2013 and fully cover the group's 700kt requirements. This will eliminate the risksassociated with Acron's dependency on a monopolistic supplier, OAO Apatit . A newdispute over the terms and conditions of Acron's contract resulted in the suspension of suppliesfrom Apatit in May 2012. The dispute was resolved in July 2012 but led to the temporarysuspension of NPK production in June 2012.
Fitch derives additional comfort from the announced involvement of Vnesheconombank (VEB) inthe financing of the Talitsky mine development. The bank will pay USD226m for a stake of 20%minus one share in Verkhnekamsk Potash Company (VPC), the subsidiary developing the potash site,and provide a facility of USD1.1bn (RUB33bn equivalent) to support the project. Fitchunderstands that Acron plans to invite other third parties to the capital of VPC but will keep acontrolling share in the company. This alleviates the agency's concerns about the potentialimpact of a fully-debt financed expansion on Acron's leverage. Total capex is estimated atUSD2.8bn (including USD560m for the license acquired in 2008) with commissioning in 2016.
Under Fitch's rating case, Acron's net FFO (funds from operations) leverage increases toaround 3.0x in 2014 from 2.1x at end-2011, reflecting sustained high levels of investments andpressure on operating cash flow from rising raw material costs and erosion in selling prices.For the purpose of its projections, the agency excluded the equity and capex associated with VPCfrom its forecasts. Fitch assumes that the capital injections for VPC will exceed its capexrequirements until 2014 and incorporating them would have flattered Acron's consolidatedleverage ratios in 2012-2013.
The 2012 base case assumes low single digit growth in sales in 2012 and projects EBITDAmargin at around 28%. The 2013 base case also assumes supply-driven pricing pressure for Acron'score products, with a resulting low single digit drop in revenues yoy. The 15% annual increasesin natural gas prices in Russia and other cost inflation in the country will only be partlycompensated by the group's ongoing efficiency measures and EBITDA margin is forecast togradually decline over the rating horizon.
Capex (excluding VPC) is assumed at around RUB10bn p.a. (around 15% of sales) in 2012-2013.Acron will invest RUB18.6m (USD600m) in the development of an underground phosphate mine atOleniy Ruchey in 2012-2017 and plans to double its apatite concentrate capacity to 2mtpa. Thegroup also plans to spend around RUB12.4bn (USD400m) in 2012-2015 in a new ammonia unit with acapacity of 700tpa. Fitch believes that the expansion programme offers some flexibility topreserve cash should market conditions deteriorate significantly, as some of the project couldbe delayed.
The rating also captures the risks associated with Acron's opportunistic strategy. In May2012, the group launched a USD440m bid for a 66% stake in Polish fertiliser producer, AzotyTarnow (ZAT). Acron subsequently increased its offer by 25% and acquired 12% of the stock of thecompany in July for USD102m. In September, ZAT agreed to merge with chemicals producer ZakladyAzotowe in a deal that is expected to close in Q113. This would dilute Acron's interest but alsomake a further increase in its stake considerably more costly. Fitch does not expect anyadditional offers from Acron until the merger is fully executed.
Liquidity is adequate, with cash balances of RUB37.3bn at end-Q212 against short-term debtof RUB36.8bn. Acron's 2.9% stake in Uralkali ('BBB-'/Stable) was worth RUB20.9bn atend-Q212 and could also offer additional flexibility. Fitch forecasts mildly negative free cashflow (excluding potash project) in 2012. The base case assumes that Acron will be successful inraising new debt to refinance upcoming maturities and capex. The group plans to issue the firstof three RUB5bn three-year tranche under its new RUB15bn exchange-traded bond programme inOctober. The bonds will be structured as an unsecured and unsubordinated obligation of theissuer and are not subject to any financial covenants.
WHAT COULD TRIGGER A RATING ACTION?
Positive: Future developments that may, individually or collectively, lead to positiverating action include
- Successful ramp up of the phosphate project in 2013 resulting in Acron's full verticalintegration into apatite concentrate
- Neutral free cash flow (excluding potash mining capex financed via equity injections),leading to FFO net adjusted leverage maintained below 2.5x on a sustained basis
Negative: Future developments that may, individually or collectively, lead to negativerating action include
- Continued negative free cash flow generation (excluding potash capex financed via equityinjections)
- Significant cash outflows supporting aggressive distributions to shareholders and/orfinancial investments leading to FFO net adjusted leverage sustained above 3.5x
- A sharp deterioration in market conditions or Acron's cost position with a sustained dropin EBITDAR margin below 20%
The rating actions are as follows: Foreign currency long-term IDR affirmed at 'B+'; Outlook Stable Local currency long-term IDR affirmed at 'B+'; Outlook Stable Long-term national rating affirmed at 'A (rus)'; Short-term foreign currency IDR affirmed at 'B';
Local currency senior unsecured rating affirmed at 'B+' for the RUB3.5bn (series 02),RUB3.5bn (series 03), RUB3.75bn (series 04) and RUB3.75bn (series 05) bond issues, RecoveryRating 'RR4',
Local currency senior unsecured rating of' B+(EXP)'/RR4 assigned to the three-year RUB15bnexchange-traded rouble bond programme