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

DBRS Limited (DBRS) confirmed the Issuer Rating and Senior Unsecured Debt rating of Canpotex Limited (Canpotex or the Company) at A (low) with Stable trends. The rating action primarily reflects the Company’s significant structural strengths, including the commitment of its two (previously three) investment-grade equal shareholders, its cost pass-through rights and its impressive logistical infrastructure footprint, all of which support Canpotex’s strong business risk profile. DBRS emphasizes the continued robust nature of the financial profile despite the severe downturn in global potash markets, which DBRS believes to have troughed.

In the last 12 months ended June 2017, Canpotex achieved modest revenue growth, with firmer shipment volumes being offset by softer realized selling prices. Revenues were 3.2 times greater than total expenses (including interest and debt principal repayments, although there were none of the latter during the period). While shy of historical levels, this healthy coverage ratio in a harsh, prolonged potash market slump helps to illustrate the benefit of Canpotex’s agreements with its shareholders and producers. Total debt remained stable at $374 million, or $1.3 billion on an adjusted basis, a measure that reflects the substantial use of operating leases. The Portland terminal expansion was completed in 2017, and given the Company’s terminal capacity utilization of about 67%, DBRS considers Canpotex to have passed peak capital expenditures for the 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 to the ratings would be any change in the business strengths. These may include (1) reduced shareholder support (e.g., rating downgrades below investment grade); (2) a change jeopardizing the flow-through of costs; (3) a permanent, negative change in the outlook for potash demand from its current status as at February 2018; 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 Canpotex, (c) the Company has long-term lease contracts for its fleet of customized rail cars and for 40% of its ocean vessel fleet and (d) Canpotex is an important customer with long-term contracts for the provision of rail haulage from established rail service providers.

Given price stabilization in H2 2017, it is likely that Canpotex’s reported results for this period will again show an improvement when they are available. As such, DBRS anticipates a very modest incremental improvement in net price realizations going forward. Volumes are also expected to increase through 2021, albeit gradually. The overall strength of the ratings 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 the recent merger between Potash Corporation of Saskatchewan, Inc. and Agrium to form Nutrien (concluded on January 1, 2018), which has not affected Canpotex’s operations or its rights in a material way under the Canpotex shareholders’ agreement.

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

The principal methodology is General Corporate Methodology: Appendix 1 — Canpotex Limited (May 2017), which can be found on www.dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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