TEXT-Fitch revises Compagnie des Phosphates de Gafsa outlook

Tue Nov 6, 2012 11:51am EST

(The following statement was released by the rating agency)Nov 6 – Fitch Ratings has revised the Outlook on Compagnie des Phosphates de Gafsa’s (CPG) and Groupe Chimique Tunisien’s (GCT) National Long-term ratings to Negative from Stable and affirmed them at ‚AA(tun)‘ and the National Short-term ratings at ‚F1+(tun)‘.

The revision of the Outlook reflects the weakening trend in the Tunisian sovereign rating (‚BBB-‚/Negative) and the state-implied willingness to provide timely support to CPG and GCT. Fitch considers that further weakening of the Tunisian sovereign rating will put downward pressure on both CPG and GCT’s ratings. However, the fact that the sovereign guarantees some of GCT’s and CPG’s debt supports the rating profile.

Both issuers‘ standalone credit profiles are to some extent constrained as a result of being separate legal entities, representing separate links in the fertiliser value chain. Vertical integration is often viewed positively as a rating factor. Whilst it is possible that the higher margin CPG might supply GCT at favourable raw material prices as a result of common ownership, this is by no means certain as CPG has to fund its own investment plans and liquidity in a challenged market and financing environment.

Both CPG and GCT managed to sustain adequate credit profiles in 2011, despite substantial production decline and lower profitability, featuring a net cash position at FYE11. However going into 2012, the cash position is expected to deteriorate given weak top line revenue recovery as production is still below historical levels and the execution of capital expenditure plans. Moreover, the government shareholder is expected to continue drawing material cash dividends from both CPG and GCT. Dividend distributions reached TND160m and TND330m, respectively, in 2012, putting the liquidity position of both companies at risk should production face further obstacles.

Fitch expects 2012 phosphate production to improve by 30% compared to 2011 to 3mt yet to remain below historical levels and volume sales to be supported by available phosphate stocks. The agency also notes that the sustainability of phosphate production at below 5mt pa is likely to cut into phosphate stocks and result in supply disturbances by 2014/2015.

CPG continues to benefit from favourable phosphate rock prices at an average of USD 125/t in 2012 which should support profitability. The agency estimates that CPG’s full-year sales will reach 4.2mt, 27% better than 2011, with revenue up 26%. However, in 2013, as prices are expected to decline, revenue growth is solely dependent on full production recovery.

CPG continues with its expansionary plans intended to upgrade phosphate production by 1m tons by 2015 and an additional 2.5m tons by 2016 for a total cost of TND540m spread over 2013-2016. CPG continues to hold a net cash position and Fitch does not expect this capex to materially affect CPG’s credit profile, unless production does not recover to normal levels.

Fitch expects GCT to lose its net cash position in 2012 as operating margins continue to tighten and FCF is expected to turn heavily negative. GCT revenue is expected to increase by 17% however operating profitability will come under pressure due to high raw material prices and EBITDA margin should further reduce to 1% after 4% in 2011.

GCT is continuing the construction of a TSP plant in M’dhilla for a total cost of TND530m and making environmental investments for a total TND310m. The agency expects leverage to increase in 2012 on the back of lower EBITDA and higher debt. The net adjusted leverage ratio should increase to 1x in 2012 and 2013 and FCF debt service coverage will turn negative.

Both companies‘ ratings remain constrained by the lack of diversification and the cyclicality of the global agriculture market, which depends on unpredictable factors such as climate and geopolitics. The ratings also factor in exposure to global commodity prices and the US dollar/Tunisian dinar exchange rate.

WHAT COULD TRIGGER A RATING ACTION?

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

– A downgrade of Tunisia’s IDR
– State divestment

(Caryn Trokie, New York Ratings Unit) http://www.reuters.com/article/2012/11/06/idAFWNA898520121106