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ACRA assigns А(RU) to “KuibyshevAzot” PJSC, outlook Stable

The credit rating assigned to “KuibyshevAzot” PJSC (the Company) reflects the medium size and moderate profitability of the Company, high assessment of its operational risk profile, low leverage, good liquidity assessment, and the medium coverage indicators. The rating is restricted by the very low assessment of free cash flow caused by the investment peak the Company is currently undergoing.

The Company is a leading manufacturer of caprolactam, polyamide, textile and industrial yarns in Russia, the CIS and Eastern Europe, and it is among the top 10 enterprises in the domestic nitrogen industry. In 2018, the Company's shares in the total Russian production output were 54% for caprolactam, 99% for polyamide, and 4.7% for nitrogen fertilizers.

Key rating assessment factors

The strong assessment of the Company's operational risk profile stems from the low production costs compared to world peers, a flexible production model and high diversification of the product line, high manufacturability, moderate cyclicality, and high market saturation. Geographical diversification is assessed as very high; the share of exports in revenues is 53%. Over the years, the Company has successfully implemented its strategy aimed at increasing the production output and the share of products with high added value. In 2000–2018, the Company increased the output more than two-fold, including ammonia (by 108%) and caprolactam (by 100%). Moreover, new high-tech polyamide, industrial and textile yarns, tire cord and engineering plastics production facilities were built, while a number of state-of-the-art resource-saving facilities were also established through joint ventures with world market leaders. The Company's strategy until 2025 envisages further increase in the production output, strengthening the cost-saving leadership through new energy-efficient technologies, expansion of the product range, and increase in the share of products with high added value.

The profitability is assessed as medium. In 2019, the market conditions for caprolactam and associated products have deteriorated, following which the Company's profitability declined. According to ACRA's estimates for 2019, the FFO margin before interest charges and taxes will be 13.6% as compared to the record high 22.1% in 2018. ACRA expects that in 2020–2022, the relevant markets will restore to pull the margin up to 19–21%.

Low leverage and medium coverage. Taking into account the profitability decline in 2019, ACRA expects that the ratio of total debt to FFO before net interest charges will grow to 3.6x against 1.9x in 2018 and the ratio of FFO before net interest charges to interest charges will decline to 3.8x against 6.9x in 2018, however by 2022, the ratio of total debt to FFO before net interest charges may decline to 2.2x and the ratio of FFO before net interest charges to interest charges may go up to 6.7x. For the period from 2017–2022, the weighted average ratio of debt to FFO before net interest charges is estimated by ACRA at 2.8x, and in ACRA' opinion, the qualitative leverage assessment is very high due to the well-balanced debt structure in terms of maturities, currencies and interest rates. The weighted average ratio of FFO before net interest charges to interest charges may reach 4.9x, according to ACRA's estimates.

The very strong liquidity is supported by the significant amount of undrawn credit lines, which, together with operating cash flow, is expected to cover the Company's capital expenses and debt repayments in the next three years. Qualitative assessment of liquidity is also high due to the comfortable repayment schedule of the debt portfolio in the medium term and well-diversified sources of funding.

Very low assessment of cash flow is due to the significant amount of capital investments planned by the Company. According to ACRA's estimates for 2017–2022, the weighted average FCF margin of the Company is expected to be at -4.8% and the weighted average ratio of capital expenses to revenue at 16.4%. The peak of the Company's investments is to pass by 2022, and the Agency expects the ratio of capital expenses to revenue to go down to 10% and the FCF margin to become positive.

Key assumptions

  • In 2020–2022, the annual average prices for urea to grow by 1.1%, for urea-ammonia nitrate by +2.7% and for ammonia nitrate by +6.5%;
  • The annual average prices for caprolactam to grow by 3.3% in 2020–2022;
  • The Company to implement its production plans.

Potential outlook or rating change factors

The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.

A positive rating action may be prompted by:

  • The average weighted ratio of total debt/FFO before net interest charges going down below 2х and the average weighted ratio of FFO before net interest charges to interest charges growing above 5х;
  • The average weighted ratio of FFO before net interest charges to interest charges growing above 10х;
  • The average weighted FCF margin becoming positive and the ratio of capital expenses to revenue going below 10%;
  • A 10% growth (against the base case scenario) in dollar prices for the Company's products in 2020–2022;
  • The annual average RUB/USD exchange rate going up to 75 in 2020–2022.

A negative rating action may be prompted by:

  • The average weighted ratio of total debt to FFO before net interest charges growing above 3.5х;
  • The annual average RUB/USD exchange rate going down to 58 in 2020–2022;
  • A 10% drop (against the base case scenario) in dollar prices for the Company's products in 2020–2022.

Rating components

Standalone creditworthiness assessment (SCA): а.

Adjustments: none.

Issue ratings

No outstanding issues have been rated.

Regulatory disclosure

The credit rating has been assigned under the national scale for the Russian Federation and is based on the Methodology for Credit Ratings Assignment to Non-Financial Corporations under the National Scale for the Russian Federation and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities.

A credit rating has been assigned to “KuibyshevAzot” PJSC for the first time. The credit rating and its outlook are expected to be revised within one year following the publication date of this press release.

The assigned credit rating is based on the data provided by “KuibyshevAzot” PJSC information from publicly available sources, as well as ACRA’s own databases. The credit rating is solicited, and “KuibyshevAzot” PJSC participated in its assignment.

No material discrepancies between the provided data and the data officially disclosed by “KuibyshevAzot” PJSC in its financial statements have been discovered.

ACRA provided additional services to “KuibyshevAzot” PJSC. No conflicts of interest were discovered in the course of credit rating assignment.

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