TEXT-S&P summary: Qatar Fertiliser Company (Q.S.C.C)
QAFCO is 75% owned by Industries Qatar QSC (AA-/Stable/--), which in turn is 70% owned by QP, and 25% by Norway-based Yara International ASA (Yara; BBB/Stable/A-2). Since the State of Qatar fully owns QP, we consider QAFCO to be a government-related entity (GRE). We apply two notches of support to QAFCO's stand-alone credit profile (SACP), which we assess at 'a-', reflecting our opinion that there is a "high" likelihood that the State of Qatar would provide timely and sufficient extraordinary support to QAFCO in the event of financial distress. QP already provides ongoing support, most notably in the form of low feedstock prices, which underpin QAFCO's favorable cost position.
In accordance with our criteria for GREs, our view of a "high" likelihood of extraordinary government support is based on our assessment of QAFCO's:
-- "Important" role for the Qatari government, in that the company forms part of the government's hydrocarbon diversification strategy, although its primary product is nitrogen fertilizer, which is destined for export markets; and
-- "Very strong" link with the Qatari government, which has effective control of the company and treats it as an industrial downstream business. QAFCO also benefits from an integrated, strategically located facility that allows it access to Asian and African markets and ensures significant economies of scale. The rating is constrained by QAFCO's exposure to the volatile and cyclical nitrogen-based fertilizer market. The company has low product diversification and derives its production from a single site.
S&P base-case operating scenario
QAFCO had a strong year in the 12 months to March 31, 2012, reporting revenues of Qatari riyal (QAR) 5.9 billion ($470 million), a 32.3% increase year on year, and an EBITDA margin of 64%. The increase reflects primarily higher production volume on the completion of QAFCO-5 and peak fertilizer prices in 2011. We anticipate a revenue decline for the full-year 2012, owing to lower fertilizer prices, followed by a volume-driven pick up in 2013 with the commissioning of QAFCO-6. We believe the company's profitability will remain robust, with continued very high margins supported by low-cost feedstock prices. The feedstock prices agreed with QP are due for renegotiation in 2012. However, we don't anticipate a significant increase at this point in time.
S&P base-case cash flow and capital-structure scenario
We anticipate that QAFCO will maintain a ratio of FFO (funds from operations) to debt of over 50% (compared with 69.3% as of March 31, 2012) and total debt to capital of less than 35% (compared with 28%) under a mid-cycle pricing scenario. Fertilizer prices were well above what we consider mid-cycle prices in 2011. Despite significant debt repayments of QAR1.38 billion due in 2012, we believe QAFCO will maintain strong positive free operating cash flow (FOCF). FOCF for the 12 months ended March 31, 2012, was QAR928 million (QAR940 million for 2011).
We assess QAFCO's liquidity to be "adequate." We estimate a sources-to-uses ratio of about 1.5x for 2012 and 2013 under our mid-cycle pricing scenario.
QAFCO's had the following main liquidity sources on March 31, 2012:
-- Consolidated cash balances of QAR1 billion (QAR300 million of which we consider maintenance cash); and
-- FFO in the coming 12 months that we estimate at more than QAR3 billion. Uses of liquidity over the coming 12 months comprise:
-- Short-term debt obligations of QAR1.38 billion on March 31, 2012;
-- Capital expenditures of around QAR427million by our estimates; and
-- A dividend payment similar to, or higher than, the QAR668 million paid out in the first quarter of 2012, by our estimates. The term loan has an EBITDA-to-debt-service covenant of minimum 2x. We anticipate there will be limited, but sufficient, headroom under the covenant in 2012 due to significant debt maturities. We believe headroom in subsequent years will likely be comfortable.
The stable outlook reflects our view that QAFCO will maintain its "satisfactory" business risk profile, supported by continued favorable feedstock prices. In addition, we consider that QAFCO will sustain financial credit protection ratios in line with a "modest" financial risk profile, with FFO to debt of over 50% and total debt to capital of less than 35% throughout the investment phase of the expansion of its production plant.
Failure to execute the business plan, for example because of an unforeseen sustained weakness in urea pricing or delays in the QAFCO-6 build-out, could potentially result in a lower rating. A significant increase in the price of gas supplied by QP or a weakening in the link with the State of Qatar--we which currently don't expect--could also result in a lower rating. An upgrade is unlikely at this stage; a precondition would be greater scale and operational diversification and/or a sovereign upgrade.
Related Criteria And Research
-- General Criteria: Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010
-- Methodology And Assumptions: Standard & Poor's Standardizes Liquidity Descriptors For Global Corporate Issuers, July 2, 2010
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- Key Credit Factors: Business and Financial Risks In The Commodity And Specialty Chemical Industry, Nov. 20, 2008.
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
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