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OCI N.V.
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The document is not a part of your current subscription. Credit Opinion: OCI N.V.: Update following rating affirmation
The document is not a part of your current subscription. Covenant Quality Assessment: OCI N.V.: Covenant Quality Post-Sale Snapshot:$400m 4.625% Secured Notes due 2025/€400m 3.625% Secured Notes due 2025
Rating Action: Moody's affirms OCI's Ba2 rating, negative outlook, assigns Ba3 rating to proposed issuance
Announcement of Periodic Review: Moody's announces completion of a periodic review of ratings of OCI N.V.
Announcement of Periodic Review: Moody's announces completion of a periodic review of ratings of OCI N.V.
Rating Action: Moody's changes outlook on OCI N.V.'s rating to stable, affirms Ba2 rating
11 May 2021
Frankfurt am Main, May 11, 2021 -- Moody's Investors Service ("Moody's") has today changed the outlook on OCI N.V.'s (OCI) rating to stable from previously negative. Concurrently Moody's affirmed OCI's Ba2 corporate family rating (CFR) and the Ba2-PD probability of default rating (PDR). Moody's has also affirmed the Ba3 rating on the backed senior secured notes borrowed by OCI N.V..
RATINGS RATIONALE
The stabilization of OCI's rating outlook reflects Moody's expectations that OCI´s EBITDA and cash generation will recover strongly in 2021 and that free cash flow (FCF) generated will be applied to reduce gross debt. This will result in improved credit metrics which are adequate for a Ba2 rating and result in a capital structure better placed to withstand the cyclicality inherent to OCI's end-markets
Moody's expects that OCI's EBITDA generation in 2021 will benefit from improved average pricing for nitrogen fertilizer and methanol through 2021 due to strong demand from China, higher crop prices, higher expected planted acreage, increasing industrial demand and some production curtailments. Furthermore, Moody's forecast incorporates the expectation that production volumes for methanol and ammonia in 2021 will increase due to the absence of larger turnarounds and consistently high operating rates across OCI's platform. Based on these assumptions, Moody's expects that OCI will generate Moody's adjusted EBITDA in excess of $1.3 billion in 2021 resulting in a Moody's adjusted gross leverage of below 3.5x. The favorable price environment will enable the company to generate meaningful FCF increasing its capacity to reduce gross debt. In 2021, Moody's forecast incorporates a gross debt reduction of at least $500 million. In January 2021, OCI already repaid around $147 million of bonds issued at its subsidiary Iowa Fertilizer Company (IFCO). In combination with scheduled debt amortizations this has resulted in a year to date gross debt reduction of around $220 million during Q1 2021. Expected debt reduction in 2021 will put the company's capital structure on a more solid footing to withstand the cyclicality inherent to OCI's business model. The company targets a net leverage (company definition) of around 2x through the cycle (3x as of end March 2021).
The Ba2 rating also takes into account the group's complex capital structure which might constrain its ability to apply FCF to debt reduction. Also, cash flow generated within the Fertiglobe perimeter (which is 58% owned and fully consolidated; Fertiglobe accounts for around 50% of OCI's consolidated EBITDA per March 2021) will not be available to serve debt at the OCI N.V. level or at other operating subsidiaries. Cash from the Fertiglobe perimeter can only be upstreamed to the OCI N.V. level via dividend payments, which results in some cash leakage to minority shareholders. However, Moody's adjusted debt/EBITDA also does not take into account the value of OCI's 50% participation in Natgasoline LLC (B1, neg).
LIQUIDTY PROFILE
OCI's liquidity profile is solid. As of March 2021, the company had $770 million of cash on balance sheet and around $500 million of availability under its $850 million senior secured revolving credit facility as of December 2020. In addition, the company's liquidity profile benefits from around $195 million of committed revolving credit facilities at local subsidiaries, which are currently undrawn and available to cater liquidity needs of respective subsidiaries. In combination with expected FCF generation those sources should be sufficient to cover mandatory debt repayments, swings in working capital and capital expenditures. The revolving credit facilities contain financial covenants, which Moody's expects to be met at all times.
STRUCTURAL CONSIDERATIONS
The one notch differential between the Ba2 CFR of OCI N.V., which is the ultimate holding company of the group, and the Ba3 rating assigned to the senior secured notes issued by OCI N.V. reflects: 1) the structural subordination of OCI N.V.'s creditors to those of its US based operating subsidiary Iowa Fertilizer Company and North African operating subsidiaries, whose financial debt is largely secured against respective assets; and 2) the relatively weak guarantor package supporting OCI's Senior Secured Notes.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook on OCI's rating reflects Moody's expectation that gross leverage will remain within the guidance for a Ba2 rating in the next 18-24 months and that the company will able to generate meaningful positive FCF and reduce gross debt.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could upgrade OCI's corporate family rating if the company strengthens its capital structure, such that debt/EBITDA falls below 3x and RCF/debt increases above 20% on a sustained basis. Furthermore, we would expect a track record of positive FCF generation, with the FCF/debt metric in the high-single-digit percentages.
Moody's could downgrade OCI's rating if the company fails to reduce Moody