January 27, 2016 | Cbonds
|Fitch Ratings has upgraded Russia-based chemical producer PJSC Kazanorgsintez's (KOS) Long-term Issuer Default Rating (IDR) to 'B' from 'B-'. Outlook is Stable. The Short term IDR is affirmed at 'B'. |
The upgrade reflects KOS's consistent multi-year absolute debt reduction and an improvement of its liquidity position following the successful repayment of USD101m eurobonds in March 2015. We expect KOS's funds from operations (FFO) adjusted net leverage to have fallen to its historical minimum of 0.3x in 2015, after 0.9x in 2014 and above 2x in previous years.
The Stable Outlook reflects our view that the company will maintain adequate liquidity and moderate leverage consistent with the current IDR. It also incorporates the weak visibility of KOS's 2016-2020 investment programme schedule, which will impact the company's re-leveraging path.
KEY RATING DRIVERS
Liquidity Robust after Eurobonds Repayment
KOS accumulated sufficient liquidity to repay its USD101m eurobonds in March 2015 as well as other smaller maturities. It entered 2H15 with a moderate RUB12.1bn total debt (FYE14: RUB19.7bn), which included RUB4.2bn short-term debt, against a RUB9.8bn cash and deposit cushion. The repayment schedule for the remaining debt is fairly smooth, allowing KOS to comfortably cover it in 2H15 and 2016 with available cash and its free cash flow (FCF) generation.
Leverage Minimal; to Rise
KOS's deleveraging has been better than our previous expectations as a weak rouble helped the company to generate stronger FCF since 4Q14 on its USD-denominated exports (approximately 20% of total sales). Leverage reached 0.9x at end-2014, and we expect it to fall below 0.5x on strong operational cash flow, moderate capex and a 30% dividend payout. These leverage levels are considered strong relative to the IDR.
The company's intent to shift to large-scale expansionary investments from current smaller-scale optimisation capex between late 2016 and 2020 results in a lack of visibility on future FCF generation and re-leveraging. However, current leverage provides reasonable headroom for additional capex, and there is no immediate rating pressure from the future investment cycle, as reflected in the Stable Outlook.
Resilient Polymer Market until 2017
The pricing of the Russian polymer market has moderate links with European and Asian market price levels. European market prices have shown resilience, despite a cheaper naphtha (direct oil derivative) input as polymer capacities lack output flexibility, and benefit from resilient retail and transportation end-markets. Russian polymer prices therefore further increased in 2015, and we estimate KOS's revenue at above RUB60bn in 2015 and 2016 and margins at a record 30%-32%.
We, however, expect significant capacity additions from the US and a recovering rouble to shave 5%-10% off the prices of KOS's export and domestic sales in 2017 and 2018, taking revenues and margins back towards 2014 levels. We also conservatively assume KOS's output volumes will remain flat at 2015 levels.
Supply Contract Renewal in 2015
KOS renewed its ethane supply contract with OAO Gazprom (BBB-/Negative) in 4Q15 for another 10 years with comparable terms and conditions. The contract linearly links ethane purchasing price with the polyethylene selling price, stabilising KOS's margins. The contract secures supply from KOS's key ethane supplier, given the lack of immediately available and sufficient alternatives.
The ratings are constrained by KOS's exposure to commodity chemicals, the small size of the company relative to global diversified chemical groups competing in its core polymer markets, its single-site operations and limited product and geographical diversification. Finally, the ratings incorporate higher-than-average legal, business and regulatory risks in Russia (BBB-/Negative/F3) and a lack of information on KOS's ultimate beneficiaries.
- Russian polymer prices to rise 5% in 2016 before falling 10% in 2017 and 5% in 2018
- KOS's polyethyelene and polycarbonate volumes conservatively assumed to be flat until 2018
- USD/RUB to hit 65 in 2016 and fall back towards 50 by 2018
- New investment cycle with capex/sales approaching 35% starting from 2017 (2015E: 8%)
- High capex and 30% dividends payout ratio to push leverage to 2x by 2018 (2015E: 0.6x)
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Better visibility of the future investment schedule coupled with FFO adjusted net leverage being sustained below 2.0x;
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Aggressive investments or prolonged market deterioration leading to FFO adjusted net leverage above 4.0x on a sustained basis;
- Liquidity shortfall leading to FFO fixed charge coverage falling below 3.0x (2015E: 10x);
- Increasing reliance on FX debt leading to material FX mismatch between debt and earnings
Liquidity was adequate at end-2014, with RUB4.1bn cash and RUB6.1bn deposits covering RUB8.8bn short-term debt, including RUB6.1bn eurobonds due in 1Q15. Liquidity strengthened further in 1H15 as RUB9.8bn cash and short-term deposits comfortably covered RUB4.2bn short-term debt. Strong positive FCF in 1H15 resulted in improved liquidity during 1H15 and we expect this to help KOS comfortably cover its debt repayment peak in 2016.
|Full company name||PJSC Kazanorgsintez|
|Country of risk||Russia|
|Country of registration||Russia|
|Industry||Chemical and petrochemical industry|