DBRS Downgrades Commercial Paper Rating of Potash Corporation to R-2 (high)

DBRS Limited (DBRS) has today downgraded the Commercial Paper Rating of Potash Corporation of Saskatchewan (Potash or the Company) to R-2 (high) with a Stable trend from R-1 (low). This action resolves the Under Review with Negative Implications status that was applied to Potash on January 29, 2016. This action does not affect the Company’s Issuer Rating or Senior Unsecured Debt rating, which remain at BBB (high) with Stable trends.

While DBRS Commercial Paper (CP) ratings focus on the issuer’s ability to fulfill its short-term obligations in a timely manner, they also reflect the overall credit strength of the issuer. (See “DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers,” April 2015 under the Methodologies section of the DBRS Web site.) As per DBRS’s methodology for determining short-term ratings, an issuer with a BBB (high) long-term rating would normally qualify for an R-2 (high) short-term rating. (See “Short-Term and Long-Term Rating Relationships” under the Rating Scales section of the DBRS Web site.) In order to qualify for an R-1 (low) rating, the issuer needs to demonstrate an exceptional level of cash generation ability and liquidity relative to its structural debt level.

Potash’s CP rating was traditionally supported by its superior liquidity position and exceptional cash flow generation relative to its structural debt levels. However, Potash’s current financial position, which reflects weakening cash flows and credit metrics over a number of years, no longer qualifies the Company as an exceptional case, especially in the context of the unfavourable near-term outlook. Adjusted cash flow-to-debt weakened to 48%, and adjusted debt-to-EBITDA weakened to 1.9 times in 2015.

While reporting Q4 2015 results that were below expectations, the Company also announced a 34% reduction in its dividend and that a more cautious outlook was required going forward. In 2016, weak pricing may result in a decrease of gross margin from the Potash segment of possibly almost 40% compared with 2015. Weak prices for Nitrogen are also expected to drive gross margins considerably lower in this segment in 2016 despite higher production capacity and volume sales, and the favourable effect on profitability of lower natural gas prices. In Phosphates, the smallest segment, gross margin is expected to be broadly in line with 2015 results, as cost reduction efforts and higher sales volumes offset lower pricing.

Potash’s long-term ratings are well supported by its very strong business profile and financial metrics. The Company remains a global-leader in the production of lower-cost fertilizer, a strength that was bolstered by the cessation of potash mining activities at the higher-cost Picadilly, New Brunswick, operation. Potash has demonstrated a consistent track record of delivering excellent profitability (despite the recent weakness), and it operates in a safe political environment (Canada). The resource base is high quality and plentiful, implying a long reserve life. Although the Company’s limited product diversification exposes it to downturns such as the one currently underway, the liquidity position remains solid.

As explained above, the Company’s cash generation and associated liquidity are no longer considered exceptional for its current Issuer Rating, and therefore do not support an R-1(low) CP rating. Should the Company qualify for an upgrade of its long-term ratings at some point in the future, DBRS would likely consider upgrading the Commercial Paper rating.

Notes:
The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodologies are Rating Companies in the Mining Industry (October 2015), Rating Companies in the Industrial Products Industry (June 2015) and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (April 2015), which can be found on our website under Methodologies.