DBRS Confirms Canpotex Limited at A (low) with Stable Trend

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Debt ratings of Canpotex Limited (Canpotex or the Company) at A (low) with Stable trends. The rating action primarily reflects the Company’s significant structural strengths giving it a strong business risk profile, including the commitments of its three investment-grade equal shareholders, its cost pass-through rights and its excellent logistical infrastructure footprint. DBRS also notes the continued robust nature of the financial profile despite the severe downturn in global potash markets.

In the 12 months to June 2016 (LTM), Canpotex suffered revenue declines driven by lower shipment volumes and realized selling prices. Revenues were 3.6 times greater than total expenses (including interest and debt principal repayments, although there were none of the latter during the period). While below historical levels, this healthy coverage level in a severe, prolonged potash market downturn helps to illustrate the benefit of Canpotex’s agreements with shareholders. Total debt remained stable at $373 million, or $1.3 billion on an adjusted basis, a measure that reflects the heavy use of operating leases. In June 2016, the Company decided against initiating a largely debt-financed ~$900 million port facility project in Prince Rupert, B.C. DBRS does not anticipate any other major spending initiatives in the near to medium term.

Although continued deterioration in the revenue/expense coverage ratio could eventually result in DBRS considering a negative rating action, especially if driven by a major debt-financed project, of greater significance on the rating would be any change in the business strengths. These may include: (1) any development that materially undermined shareholder support (e.g., credit rating downgrades of shareholders below investment grade); (2) a change to the shareholder agreement that would jeopardize the flow-through of costs; (3) a permanent, negative change in the outlook for potash demand in Canpotex’s key destination markets from the current status in February 2017; or (4) an unforeseen event that precludes Canpotex from accessing critical infrastructure, although this is unlikely because: (a) shareholders own a majority stake in the Neptune (Vancouver) port facility, (b) the Portland port facility is owned by a Canpotex subsidiary, (c) the Company has long-term lease contracts for its fleet of customized rail cars and for half of its ocean vessel fleet and (d) Canpotex is an important customer with long-term contracts for the provision of rail haulage from established North American rail service providers.

Given continued price weakness in H2 2016, it is likely that Canpotex’s reported results for this period will again show continued deterioration when they are available. However, amid signs of market firming leading into 2017, DBRS is anticipating a very modest incremental improvement in net price realizations going forward. Volumes are also expected to increase through 2017. Therefore, DBRS anticipates further financial profile weakness in H2 2016, followed by incremental improvement.

The overall strength of the rating is robust, largely due to the Company’s significant business strengths. Nonetheless, substantial and sustained further deterioration in the financial risk profile could lead to a downgrade. At this stage, DBRS does not anticipate any material changes to the Company’s business risk profile going forward, including consideration of the proposed merger between PCS and Agrium, which is not expected to affect Canpotex’s operations or its rights under the shareholder agreement.

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

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.

The applicable methodology is General Corporate Methodology (November 2016), Canpotex Limited Appendix, which can be found on our website under Methodologies.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.