DBRS Assigns BBB (high) Rating with a Stable Trend to Potash’s Senior Unsecured Notes

DBRS has today assigned a BBB (high) rating with a Stable Trend to the two new issues announced by Potash Corporation of Saskatchewan Inc. (Potash or the Company): $500 million aggregate principal amount of 3.75% notes due September 30, 2015, and $500 million aggregate principal amount of 4.875% notes due March 30, 2020 (collectively, the Notes). The Notes are senior unsecured obligations of Potash and will rank equally in right of payment with all of Potash’s existing and future senior unsecured indebtedness. Potash intends to use the net proceeds to repay amounts outstanding on bank facilities and for general corporate purposes. The offering is expected to settle on September 28, 2009, subject to customary closing conditions.

Potash faces difficult near-term prospects, with low potash shipments and uncertain potash prices, which DBRS expects will lead to near-term weakening credit metrics. Although Potash achieved record earnings in 2008, worsening global economic conditions in the last quarter of 2008 and extending into 2009 have led to a sharp decline in the Company’s shipments of potash and weakness in fertilizer prices in general. This has been exacerbated by the delays to deliver potash to Chinese markets to date in 2009, resulting in a dramatic drop in potash shipments over the first half of 2009, down more than 80% over record first half of 2008 levels. DBRS expects the current weak market conditions to persist throughout 2009.

Weak fertilizer markets, elevated capital spending and share buybacks have led to a deterioration of Potash’s credit metrics. At June 30, 2009, gross debt-to-capital had risen to 41% compared with 27% at December 31, 2007, before heavy capex and share repurchases had taken hold. DBRS expects coverage metrics will be considerably lower in 2009, well below those in the record-earnings year in 2008 and even weaker than in 2007. Potash’s financial performance will deteriorate further with weak Q3 2009 earnings and negative gross free cash flows as capital spending remains high and demand for potash remains low. Despite further weakening, DBRS views the expected weaker credit metrics as reflective of bottom-of-the-cycle measures, yet still acceptable, albeit low, for the rating.

DBRS expects 2009 potash shipments to be at historically exceptionally low levels, but recovery should take hold in 2010 when fertilizer application and re-stocking are back on track. Over the medium-to-longer term, DBRS expects (1) rising crop prices due to a low stocks-to-use ratio will support attractive cash margins for farmers; (2) global population growth and improving diets will lead to a higher need for grains and more planted acreage; and (3) the need to optimize yield due to limited arable land will increase the use of fertilizers. Given the anomalously high potash prices seen in 2008, it is more difficult to forecast where potash prices will settle, but they are expected to remain well below the record levels achieved in 2008. Despite the potash price uncertainty, DBRS expects that Potash’s financial metrics will improve beginning in 2010 and into 2011.

The new debt issue will free up some bank facility borrowing capacity and better position the Company to weather the current weakness in fertilizer markets. We note the Company’s elevated capital spending program in the face of weak potash markets and excess potash production capacity and expect the Company to be judicious and closely align its capital spending to match operating cash flow generation in order to help moderate any further deterioration of its financial metrics. With a recovery of fertilizer markets expected in the medium term, DBRS expects the Company’s financial profile to strengthen and its leverage to moderate. If demand does not pick up as anticipated, operating performance and cash flows are lower than expected or are not used to reduce leverage or Potash is not judicious in capex spending, negative rating action could result.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Mining, which can be found on our website under Methodologies.

This is a Corporate rating.