Potash Price War Risks Weighing on Uralkali Bonds: Russia Credit

Investors drove OAO Uralkali’s borrowing costs to a record and Moody’s Investors Service warned it may cut the Russian potash producer’s debt rating to junk amid concern the company’s earnings may suffer after it exited a cartel for the crop nutrient.

The yield on Uralkali’s dollar bonds due April 2018 jumped 28 basis points to 5.65 percent yesterday, taking its two-day advance to 70 basis points, the biggest increase since the debt was sold in April. That squeezed the company’s yield discount to emerging-market metal and mining peers to 151 basis points July 30, from 187 the day before, JPMorgan Chase & Co. indexes show.

“It’s unclear what this will do to the market and what will happen to Uralkali’s” earnings, Konstantin Nemnov, who helps manage the equivalent of $2.4 billion in debt at TKB BNP Paribas Investment Partners in St. Petersburg, said by phone. “This lack of clarity is the worst thing for bondholders.”

The world’s biggest potash producer, whose board approved a new Eurobond program last month, announced July 30 it would end production restrictions that underpinned global prices and abandoned a venture with a Belarusian miner that controlled exports from the former Soviet Union. The decision drove up the cost of borrowing for Uralkali’s rivals, lifting the yield on similar-maturity bonds of Saskatchewan-based Potash Corp. of Saskatchewan Inc. 24 basis points to 2.19 percent July 30.

Belarus Deadlock

Moody’s, which rates Uralkali Baa3, its lowest investment-grade ranking, said the company’s financial and liquidity profile may come under pressure. The bonds kept gains, with the yield down 18 basis points at 5.47 percent as of 6:11 p.m. in Moscow.

Uralkali’s cooperation with Belarusian potash producer Belaruskali reached “a deadlock” after the government in Minsk canceled the companies’ exclusive right to export the country’s potash and Belaruskali made independent deliveries, according to Uralkali’s July 30 statement. The joint venture controlled about 40 percent of global potash exports.

Uralkali’s earnings before interest, taxes, depreciation and amortization may fall 40 percent next year and its net debt may climb to a record two times Ebitda, Konstantin Artemov, who helps manage about $500 million at Raiffeisen Capital in Moscow, said by phone yesterday.

The company’s net debt was 0.99 times Ebitda in 2012, data compiled by Bloomberg show. Uralkali’s press representative declined to comment when contacted by phone.

Uralkali sees global potash prices falling below $300 a ton after the company changes its trading policy, Chief Executive Officer Vladislav Baumgertner said July 30. The last price accord for China was $400 a ton.

Belarus Bonds

Belarusian bonds sank for a eighth day today, the longest slump since June, on concern a drop in the price of the county’s main commodity will crimp budget revenue.

The yield on Belarus’s dollar notes due 2015 rose 35 basis points, or 0.35 percentage point, to 9.38 percent yesterday, the highest since June 26.

Belarus, which has no significant natural resources other than potash, earned $2.7 billion from selling the fertilizer abroad last year, or 5.6 percent of total export revenue.

The yield on Russia’s dollar bonds maturing in March 2030 fell one basis point to 4.01 percent. The extra yield investors demand to hold Russia’s dollar debt rather than Treasuries dropped 11 basis points to 214, compared with 193 for Mexico, according to JPMorgan Chase & Co. indexes.

“Uralkali has launched a price war,” Raiffeisen’s Artemov said. “There’s uncertainty.”

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