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 unique and robust structural strengths, including the commitment of its two investment-grade ultimate parent companies and the Company’s exclusive right to export their potash output; its cost pass-through rights, which include debt interest and principal repayments; and its impressive intermodal logistical infrastructure footprint, all of which support Canpotex’s strong business risk profile. The ratings also reflect the fact that Canpotex operates in a single commodity market (global potash) and has been exposed to the significant cyclical downturn over many years in said market. However, the continued multiples of expense coverage during this time has only reinforced DBRS’s view of this company as having substantial capacity to fulfill its financial obligations.

In 2018, revenues unadjusted for International Financial Reporting Standards 15 rose 31% to $3.5 billion, primarily reflecting price realization improvement that exceeded both 2017 levels and expectations. The market firming that potash producers and Canpotex had observed over a year ago has finally been reflected in the Vancouver MOP potash spot-price index, having risen to $245.50 and $265.50 per tonne, respectively, from $215.50 per tonne, at which it had remained throughout 2018. Note that though Canpotex’s realized prices are not linked to this index, it can provide valuable information regarding the underlying market strength and trends. Brazil and China remained the two largest destination markets, although Indonesia, India, Malaysia and, to a lesser extent, South Korea and other countries remain important. Overall, the important revenue coverage of total expenses, including debt interest and principal repayments metric, rose to 3.5 times (x) from 3.2x in 2017, with revenue improvement being the primary driver.

DBRS anticipates that the Company’s business risk profile will continue to improve incrementally as capacity expansion projects continue. However, DBRS does not anticipate these developments to materially affect Canpotex’s already robust set of structural strengths.

DBRS anticipates that revenues in 2019 should improve notably as the market remains well supported and Canpotex continues to execute on its strategic initiatives to maximize profitability on a region-by-region basis. This should support continued recovery in the revenue-coverage-of-total-expenses ratio.

Overall, DBRS anticipates that 2019 will be a year of continued recovery. That said, it is highly unlikely that Canpotex would be considered for a positive rating action. A negative rating action is improbable in the near term. For example, trade frictions between Canada and China are unlikely to materially affect potash shipments that are important to the Chinese agricultural sector; however, if such a development did occur, Canpotex’s unique structural strengths would likely minimize the credit impact, as they did during the severe cyclical decline in global potash market over the past several years.

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

The principal methodologies are General Corporate Methodology: Appendix 1 — Canpotex Limited (May 2019) and DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries (November 2018), which can be found on dbrs.com under Methodologies & Criteria.

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.

DBRS will publish a full report shortly that will provide addi¬tional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

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

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