December 01, 2014 |
|Fitch Ratings-London/Moscow-28 November 2014: Fitch Ratings has revised Tatarstan-based chemical producer OJSC Kazanorgsintez's (KOS) Outlook to Positive from Stable and affirmed its Long-term Issuer Default Rating (IDR) at 'B-'. |
The agency has simultaneously upgraded the senior unsecured rating on the outstanding USD101m loan participation notes (eurobond) to 'CCC+'/'RR5' from 'CCC'/'RR6', and affirmed the Short-term IDR at 'B'.
The Outlook revision reflects KOS's stabilised capital structure and our expectations that KOS's liquidity profile will improve over the next 12 to18 months. We expect KOS to continue generating strong positive free cash flow (FCF) exceeding RUB4bn in 2014 and RUB3bn in 2015 on a recovered polyethylene market, low capex and a 30% dividend pay-out ratio. Coupled with a RUB1.1bn cash buffer and RUB2.3bn deposits accumulated at end-1H14, this would comfortably cover RUB6bn short-term debt falling due in 2H14 and 1H15, including USD101m eurobonds due in March 2015.
We expect the company's funds from operations (FFO) adjusted net leverage to reduce to 2.0x in 2014 and 2015, from 2.2x-2.4x in 2012-2013, on absolute debt reduction and stronger FFO generation.
KEY RATING DRIVERS
Debt Repayment Hurdle in 1H15
As expected, debt reduction pace slowed in 1H14 as KOS accumulated liquidity for debt maturity peak in 1H15, including the USD101m (RUB4bn) eurobonds due in March 2015. At end-1H14 KOS's one-year liquidity sources included a RUB3.4bn liquidity buffer and over RUB4bn of positive FCF expected by Fitch for 2H14-1H15. This implies an adequate liquidity position to meet RUB6bn short-term debt as of end-1H14. In the absence of committed undrawn loans from banks, KOS may, in case of need, have to refinance with Sberbank, KOS's largest creditor, as it has successfully done in the past.
Rating Case Expectations
Our rating case projects a peak of RUB50bn revenue and flattening RUB9bn EBITDAR in 2014 on favourable polyethylene pricing and record output volumes across the product portfolio. Coupled with RUB1.2bn capex and a 30% dividend pay-out ratio, this should result in positive FCF of over RUB4bn. Starting from 2015 we expect polyethylene prices to moderate, volumes to flatten and high single-digit input cost inflation to result in moderate medium-term margin deterioration, albeit in the upper teens. Strong FFO in 2014 and significant debt repayment in 2015 are likely to result in FFO adjusted net leverage around 2.0x in both 2014 and 2015.
Supply Contract Renewal in 2015
KOS's ethane supply contract with OAO Gazprom (BBB/Negative) expires in late 2015 and is subject to renewal. Should ethane supply price deteriorate materially for KOS, this could significantly erode the company's profitability and ability to maintain operational cash flows at historical levels. Given the lack of immediately available and sufficient ethane supply alternatives, KOS may have to switch to ethylene sources, which will nevertheless be detrimental to margins.
Capex Uncertainty after 2015
While KOS's investment strategy remains moderate and focused on optimisation initiatives, it may be revised by the start of the next 2016-2020 investment phase period. While we expect KOS to retain moderate capex levels at below RUB1.5bn until 2015, there is increased uncertainty over capex starting from 2016. However, this uncertainty does not create immediate rating pressure as we expect KOS's leverage and liquidity at end-2015 to provide some headroom for additional capex.
The ratings are constrained by KOS's exposure to commodity chemicals, its small size relative to the global diversified chemical groups competing in its core polymer markets, single-site operations and limited product and geographical diversification. Finally, the ratings are discounted to reflect higher-than-average legal, business and regulatory risks in Russia (BBB/Negative/F3) and a lack of information on KOS's ultimate beneficiaries.
Positive: Future developments that could lead to positive rating actions include:
- FFO adjusted net leverage sustained below 3.0x through the cycle
- FFO fixed charge coverage sustained above 5.0x (2013: 4.0x)
- Further improvement of the liquidity profile resulting from eurobonds repayment
Negative: Future developments that could lead to negative rating action include:
- FFO adjusted net leverage sustained above 3.0x through the cycle, which would lead to the Outlook being revised to Stable
- FFO fixed charge coverage below 5.0x, which would lead to the Outlook being revised to Stable
- Sharp and sustained liquidity shortfall resulting from a deterioration in market conditions or from ethane supply issues, which would lead to a downgrade
|Full company name||PJSC Kazanorgsintez|
|Country of risk||Russia|
|Country of registration||Russia|
|Industry||Chemical and petrochemical industry|