August 12, 2013 |
|Fitch Ratings has upgraded Tatarstan-based chemical producer OJSC Kazanorgsintez's (KOS) Long-term foreign currency Issuer Default Rating (IDR) to 'B-' from 'CCC'. The agency has simultaneously upgraded the Short-term foreign currency IDR to 'B' from 'C' and the senior unsecured rating on the outstanding USD101m loan participation notes (Eurobond) to 'CCC' (RR6) from 'C' (RR6). |
KEY RATING DRIVERS
The upgrade reflects KOS's dramatically improved capital structure and financial metrics. The group's recovery has been faster than we had anticipated - funds from operations (FFO) adjusted debt leverage reduced to 2.4x at end-2012 from 4.5x at end-2011 - and refinancing risk beyond 2013 has lessened. At end-2012, total debt was RUB23bn compared with RUB27bn forecast under our previous rating base case. KOS's 2012 stronger than projected operating performance and cash flow generation were due to better capacity utilisations and increased high density polyethylene volumes (+28%) and prices (+12%). Sales increased 22.5% yoy and EBITDA margin was 21.4%, up from 19% in 2011. Of the RUB7bn free cash flow (FCF) generated, RUB6.7bn was used to prepay debt.
Bulky Refinancing in 2015
We expect a reduction in the pace of debt prepayments as the Sberbank ('BBB'/Stable) facilities started amortising in June 2013 after a two year grace period. Under our revised base case, KOS generates positive free cash flow (FCF) in 2013-2014 and is able to repay scheduled maturities up until 2015. In 2015, FCF and cash balances are insufficient to cover debt repayments of RUB5bn under the Sberbank loans and the redemption of its USD101m (RUB3bn) loan participation notes. The rating case forecasts FFO adjusted leverage of around 2.4x at end 2014 and we assume that KOS will be able to refinance or extend these maturities. Although the financial metrics remain vulnerable to cyclical downturns, we believe that the debt reduction achieved by then should allow it to release some of the fixed assets pledged to Sberbank and to procure improved pricing and terms and conditions.
Sound Near-term Liquidity
FCF and cash balances cover KOS's debt service requirements over 2013-2014 under the base case. At the end of May 2013, gross debt of RUB21.6bn consisted of RUB18bn outstanding under Sberbank's senior secured loans amortising from mid-2013, the USD101m (RUB3.2bn) unsecured Eurobonds due in 2015 and unsecured bank facilities of USD13.2m (RUB0.4bn) out to 2014. KOS prepaid RUB2.5bn worth of Sberbank loans in H113 and refinanced one of its unsecured bank lines. At the end of May, the group had cash balances of RUB1bn and RUB1bn in short term deposits against maturing debt of roughly RUB2.6bn in H213-2014. Our rating case forecasts FCF of around RUB3.2bn-RUB3.7bn in 2013-2014.
2013 Base Case Assumptions
Our base rating case projects a low single digit revenue decline in 2013 reflecting flat or lower average selling prices yoy and maintenance shutdowns. This should be partly offset by better capacity utilisations overall for the Ethylene-500 plant as ethane feedstock supply from OAO Tatneft ('BB+', Stable) increased in 2013 (capacity upgrade). The group's five-year ethane supply contract with OAO Gazprom ('BBB', Stable) is due for renewal in 2014. We continue to regard the ethane supply risk as a constraint on the rating, although potential disruptions are partly mitigated by KOS's ability to source ethylene as an alternative feedstock, albeit at the detriment of margins. The rating case also assumes normalised capex levels of around RUB1.2bn and dividends equivalent to 30% of net profit.
The agency continues to assume that the benefits from the improved vertical integration (1.5 times increase in ethylene processing capacity) and ongoing energy efficiency projects will be insufficient to offset the inflationary cost environment in Russia. The EBITDAR margin is forecast to remain in the high teens with gradual erosion over the rating horizon.
The ratings are constrained by KOS's exposure to commodity chemicals, its small size relative to the large diversified chemical groups competing in its core polymer markets, its single site operations and its limited product and geographical diversification. Finally, the rating is discounted to reflect the higher than average legal, business and regulatory risks associated with Russia ('BBB'/Stable/'F3') and the absence of information on KOS's ultimate beneficiaries.
- FFO net adjusted leverage sustained below 3.0x through the cycle; and
- FFO fixed charge coverage sustained above 5.0x; and
- Further improvement in capital structure stemming from the repayment/refinancing of Sberbank's facilities with resulting financial flexibility/headroom beyond 2014.
- A sustained cash drain resulting from a sharp deterioration in market conditions or from supply disruption issues.
|Full company name||PJSC Kazanorgsintez|
|Country of risk||Russia|
|Country of registration||Russia|
|Industry||Chemical and petrochemical industry|