(The following statement was released by the rating agency)
Oct 10 - Fitch Ratings has affirmed JSC Acron's (Acron) Long-term foreign and local currency Issuer Default Ratings (IDR) at 'B+'. The Outlook on the Long-term IDRs is Stable. The agency has simultaneously assigned an expected local currency senior unsecured rating of 'B+(EXP)' and a Recovery Rating of 'RR4' to the group's new three-year RUB15bn exchange-traded rouble bond programme. A full list of rating actions is at the end of this commentary.
The affirmation reflects Fitch's view that Acron's financial profile continues to offer sufficient headroom to withstand raw material cost inflation in Russia and expected supply-driven pricing pressure for its core products, and to support its capex plans over the next two years.
The ratings also reflect the progress made on Acron's phosphate mining project, with the commissioning of the Oleniy Ruchey mine in July and the planned launch of the ore processing operations is in Q412. Production at the mine should ramp up to 1mtpa of apatite concentrate during 2013 and fully cover the group's 700kt requirements. This will eliminate the risks associated with Acron's dependency on a monopolistic supplier, OAO Apatit . A new dispute over the terms and conditions of Acron's contract resulted in the suspension of supplies from Apatit in May 2012. The dispute was resolved in July 2012 but led to the temporary suspension of NPK production in June 2012.
Fitch derives additional comfort from the announced involvement of Vnesheconombank (VEB) in the 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. Fitch understands that Acron plans to invite other third parties to the capital of VPC but will keep a controlling share in the company. This alleviates the agency's concerns about the potential impact of a fully-debt financed expansion on Acron's leverage. Total capex is estimated at USD2.8bn (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 to around 3.0x in 2014 from 2.1x at end-2011, reflecting sustained high levels of investments and pressure 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 VPC from its forecasts. Fitch assumes that the capital injections for VPC will exceed its capex requirements until 2014 and incorporating them would have flattered Acron's consolidated leverage ratios in 2012-2013.
The 2012 base case assumes low single digit growth in sales in 2012 and projects EBITDA margin at around 28%. The 2013 base case also assumes supply-driven pricing pressure for Acron's core products, with a resulting low single digit drop in revenues yoy. The 15% annual increases in natural gas prices in Russia and other cost inflation in the country will only be partly compensated by the group's ongoing efficiency measures and EBITDA margin is forecast to gradually 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 at Oleniy Ruchey in 2012-2017 and plans to double its apatite concentrate capacity to 2mtpa. The group also plans to spend around RUB12.4bn (USD400m) in 2012-2015 in a new ammonia unit with a capacity of 700tpa. Fitch believes that the expansion programme offers some flexibility to preserve cash should market conditions deteriorate significantly, as some of the project could be delayed.
The rating also captures the risks associated with Acron's opportunistic strategy. In May 2012, the group launched a USD440m bid for a 66% stake in Polish fertiliser producer, Azoty Tarnow (ZAT). Acron subsequently increased its offer by 25% and acquired 12% of the stock of the company in July for USD102m. In September, ZAT agreed to merge with chemicals producer Zaklady Azotowe in a deal that is expected to close in Q113. This would dilute Acron's interest but also make a further increase in its stake considerably more costly. Fitch does not expect any additional offers from Acron until the merger is fully executed.
Liquidity is adequate, with cash balances of RUB37.3bn at end-Q212 against short-term debt of RUB36.8bn. Acron's 2.9% stake in Uralkali ('BBB-'/Stable) was worth RUB20.9bn at end-Q212 and could also offer additional flexibility. Fitch forecasts mildly negative free cash flow (excluding potash project) in 2012. The base case assumes that Acron will be successful in raising new debt to refinance upcoming maturities and capex. The group plans to issue the first of three RUB5bn three-year tranche under its new RUB15bn exchange-traded bond programme in October. The bonds will be structured as an unsecured and unsubordinated obligation of the issuer and are not subject to any financial covenants.
WHAT COULD TRIGGER A RATING ACTION?
Positive: Future developments that may, individually or collectively, lead to positive rating action include
- Successful ramp up of the phosphate project in 2013 resulting in Acron's full vertical integration 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 negative rating action include
- Continued negative free cash flow generation (excluding potash capex financed via equity injections)
- Significant cash outflows supporting aggressive distributions to shareholders and/or financial 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 drop in 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, Recovery Rating 'RR4',
Local currency senior unsecured rating of' B+(EXP)'/RR4 assigned to the three-year RUB15bn exchange-traded rouble bond programme