OREANDA-NEWS. Fitch Ratings has revised the Outlook on PJSC Acron's Long-Term Issuer Default Rating (IDR) to Positive from Stable and affirmed the IDR at 'BB-'. Fitch has also assigned Acron's prospective RUB50bn bond programme an expected rating of 'BB-(EXP)'. A full list of rating actions is available at the end of this commentary.

The Positive Outlook reflects Acron's strong progress in deleveraging in 2015. The weak rouble and ramp up of phosphate operations underpinned positive free cash flow (FCF) and led to FFO net adjusted leverage (leverage) of 1.7x which is below the positive rating guidance of 2x. In 2016-2017, we expect Acron's divestment of its stake in Uralkali, moderate investment pace and the weak rouble to mitigate low fertiliser pricing and translate into low 1.0x-1.5x leverage.

Beyond 2017, the interplay between higher capital expenditure on potash investments, the gradually strengthening rouble, and dividend distribution might turn Acron's FCF negative and result in higher leverage. An upgrade would require Fitch to be satisfied that the company will maintain a sufficiently robust financial profile in the medium term despite these pressures.

The prospective bond issues under the RUB50bn bond programme will be issued at the PJSC Acron level and will only be subordinated to Acron's USD525m pre-export finance facility. We do not consider the bonds to be structurally subordinated to debt at Acron's cash-generating subsidiaries as PJSC Acron's share of the group's EBITDA and debt is broadly the same. As the prospective bonds' prior-ranking debt remains well below Fitch's guidance of 2.0x-2.5x EBITDA, we have not applied a notch discount to the bonds' senior unsecured expected rating. A final rating is contingent on the receipt of final documentation conforming to information already received.

KEY RATING DRIVERS

Nitrogen and Phosphate Capacities Up

Acron's new low-cost 700 thousand tonnes (kt) ammonia plant was launched in May 2016 and will ramp up to full capacity utilisation in 2H16. Another major capacity addition was the open pit phosphate mining operations at Oleniy Ruchey which completed Acron's vertical integration in phosphates, on top of self-sufficiency in nitrogen.

The next major investment steps include underground phosphate mining and potash projects. We expect underground phosphate mining to be financed mostly from phosphate-based operational cash flows, but the potash project could significantly weigh on Acron's FCF generation beyond 2017.

Deleveraging Prior to Potash Project

The weak rouble resulted in record-high EBITDA margins of above 35% in 2015-2016 despite the ongoing fertiliser price pressure. Combined with moderate capex (2015-2016 capex/sales around 15%), this has allowed Acron to rebase its leverage at below 1.5x in 2015 and around 1.0x in 2016. However, Acron's potash project requires more than USD1bn of investments, despite being stretched over eight years. Coupled with moderate rouble strengthening, this might pressurise leverage from 2018 before the projects' operational cash flows start in 2022.

Fertiliser Pricing Pressure Continues

The fertiliser pricing trend corresponded to weakness in other commodities in 2015 and 1Q16, but the trends became divergent in 2Q16. Fertiliser prices remained pressurised in 2Q16 due to several factors such as weak grain pricing, high Chinese urea exports and high end-2015 potash stocks. We expect fertilisers to start a moderate recovery in 2017. With most capacity additions expected in nitrogen and potash segments, we anticipate longer recovery in nitrogen and potash segments and shorter in phosphates.

Acron is most exposed to nitrogen-based ammonium nitrate (AN) and urea ammonium nitrate (UAN), as well as complex fertilisers (48% of Acron's 2015 sales). In Acron's portfolio, AN and UAN were hit most while complex fertilisers show resilience and posted record-high price premiums of above 20% in 4Q15 and 1H16. We conservatively believe these premiums are not sustainable and will reduce over time.

Financial Investments Reduce

Acron completed the divesture from Uralkali's minority stake in 1Q16, and is left with around a 20% stake in Polish nitrogen player Grupa Azoty. We note that the stake might be used as a liquidity source for Acron. However, we conservatively do not expect Acron to sell it or treat the stake as a liquidity source.

KEY ASSUMPTIONS

- USD/RUB of 72.5 in 2016 gradually strengthening towards 57 in 2019

- Dividend payout amounting to 30% of net income

- Nitrogen fertilisers to show mid-single digit price growth since 2017 after a 25%-27% drop in 2016, while the complex fertiliser premium declines to 10% in 2019 from 30% in 2016

- New ammonia plant of 700ktpa to ramp up throughout 2016

- Capital intensity to stay at 14%-15% in 2016-17 and increase to around 20% beyond 2017 driven by investments in the potash project

- No material acquisitions or divestures

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

- An enhanced operational profile as a result of self-sufficiency in potash.

- Ability to keep FFO net adjusted leverage below 2x and continued prudency on financial investments.

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

- Outlook Stabilisation: Aggressive capex or dividends resulting in leverage back to above 2x;

A downgrade could result from:

- Aggressive capex or dividends resulting in leverage sustained above 3x.

- Sustained materially negative FCF (excluding funding of the potash project).

- A sharp deterioration of market conditions or Acron's cost position with a sustained drop in EBITDA margin below 20%.

LIQUIDITY

Despite a short-term debt increase during 1Q16 to RUB26bn from RUB13bn, Acron's liquidity remains strong at end-1Q16 with RUB38bn cash on balance, RUB16bn long-term unutilised committed credit lines and positive free cash flow expectations for 2016.

FULL LIST OF RATING ACTIONS

--Long-term local and foreign currency IDRs affirmed at 'BB-'; Outlook revised to Positive

--National Long-term Rating affirmed at 'A+ (rus)'; Outlook revised to Positive

--Short-term foreign currency IDR affirmed at 'B'

--Local currency senior unsecured rating affirmed at 'BB-'/'RR4'