Potash Corp. Bonds Teeter Toward Junk in Price-Cut ThreatAri Altstedter
Potash Corp. of Saskatchewan Inc. bonds are heading toward junk status on wagers the breakup of one of the two marketing groups for the crop nutrient will lead to lower prices.
Potash Corp.’s implied rating has fallen to BBB-, one level above speculative grade, based on the cost to insure against losses in the company’s bonds, according to calculations from Standard & Poor’s. The drop comes after Russia’s OAO Uralkali, the largest potash producer, promised to increase output and quit a partnership with a Belarus company that controlled potash supplies from the former Soviet Union. The implied rating before Uralkali’s July 30 announcement was BBB+, already below S&P’s A- long-term rating.
The venture that Uralkali is abandoning is one of two that until now have controlled most of the world’s supply by negotiating fixed-term supply contracts on behalf of their members. That means the potash companies don’t compete with each other individually in export markets, helping them to match production with demand. Potash prices could fall 30 percent as the other marketing group, Canpotex Ltd., consisting of Potash Corp., Mosaic Co. and Agrium Inc., increases its own production, according to S&P.
“What is very helpful in a cartel-like environment is stability; when that unwinds, it can be very volatile and violent,” Ric Palombi, a fixed-income portfolio manager at McLean & Partners Wealth Management Ltd., said in an Aug. 6 phone interview from Calgary. “You either got to have a strong stomach to hold it through this, or you just got to bail and wait for a better day.”
Palombi said he does not own Potash Corp. bonds.
A spokesman for Potash Corp. said pricing in the secondary market “has changed very little.”
“We are not in a situation at this time where we need to access debt markets, but if we were, we would have no issue,” Tim Herrod, director of treasury at Potash, said by phone yesterday from Saskatoon, Saskatchewan. “Our ability to raise cash in the debt market is certainly not in question.”
S&P cut its outlook on Saskatoon-based Potash’s credit rating to negative from stable on Aug. 6, citing the threat of lower prices.
The implied rating for Calgary-based Agrium, North America’s third-largest potash miner, was BBB- Aug. 7, David Fisher, a credit analyst at S&P, said by phone from Toronto yesterday. The company currently has a BBB rating on Agrium.
Plymouth, Minnesota-based Mosaic’s implied credit rating is A-, two levels higher than S&P’s current BBB rating on the company, Fisher said.
Elsewhere in credit markets, Canada’s benchmark 10-year bonds rose today, with yields falling two basis points, or 0.02 percentage point, to 2.48 percent at 1:41 p.m. Toronto time. The price of the 1.5 percent security maturing in June 2023 added 15 cents to C$91.51.
Bank of Nova Scotia sold C$750 million ($719 million) of bonds maturing in August 2018 with a coupon of 2.75 percent.
The extra yield investors demand to own Canadian investment-grade corporate debt rather than the federal government’s fell one basis point to 121 basis points yesterday from the day before, according to the Bank of America Merrill Lynch Canada Corporate Index. Yields decreased to 3.17 percent, from 3.19 percent on Aug. 6.
Spreads on provincial bonds declined one basis point to 72 basis points yesterday from Aug. 6, Bank of America’s Canadian Provincial & Municipal Index showed. Yields fell to 2.99 percent, from 3.01 percent.
Provincial securities have dropped 2.7 percent this year, corporate bonds have gained 0.04 percent and federal-government debt has lost 2.1 percent, Merrill Lynch index data show.
The Bank of Canada auctioned C$2.7 billion of three-year bonds yesterday, with an average yield of 1.373 percent. The 1 percent securities due in August 2016 drew C$7.1 billion in bids for a bid-to-cover ratio of 2.64. The average ratio at the past five sales of the debt was 2.76.
The implied risk of Potash Corp., Canada’s largest producer of the substance, missing a debt payment in the next 12 months increased to 0.03 percent, its highest in about 10 months, according to data compiled by Bloomberg. Agrium’s one-year implied risk of default rose to 0.07 percent, the highest in about a year, the data show.
Uralkali’s move to stop cooperating with its Belarus marketing partner and increase annual production to 13 million tons next year from 10.5 million may reduce prices to below $300 a ton, according to Uralkali Chief Executive Officer Vladislav Baumgertner. That would be at least 25 percent below the latest contract price for China and the lowest since January 2010.
Potash isn’t traded on public exchanges. Prices for potash for delivery at Vancouver’s port have fallen to $410 a ton, 19 percent less than a year earlier, according to data from Green Markets, a fertilizer-industry information provider that is a unit of Bloomberg LP, the parent of Bloomberg News.
Producers in Canada and the former Soviet Union accounted for 56 percent of world potash supply last year, according to Green Markets.
Lower potash prices wouldn’t threaten an ongoing expansion of production capacity at Potash Corp.’s existing mines to 17.1 million metric tons a year, Bill Doyle, chief executive officer, said yesterday in a webcast.
Projects, begun in 2003, are almost 90 percent completed, and Doyle said he doesn’t expect lower potash prices would hinder the company’s ability to pay dividends.
“The reason for a possible downgrade is your primary product is selling at a lower price,” said Keith Hoppe, who helps manage $82 billion, including Potash Corp. bonds, as an analyst at Thrivent Financial for Lutherans. He spoke by phone from Minneapolis. “If production doesn’t change and management doesn’t do anything else, your margins are just getting squeezed.”
The premium investors demand to own the debt of Potash Corp. over government benchmarks has increased 22 basis points, to 139 basis points, from the day before Uralkali’s announcement through Aug. 6, according to Bank of America Merrill Lynch data. Agrium spreads widened 13 basis points, to 182 basis points, the data show.
With $3.5 billion total debt outstanding, Potash Corp.’s ratio of debt to earnings before interest, taxes, depreciation and amortization was 0.98 times at the end of the second quarter. If lower prices for the commodity hurt profitability, that ratio could double to two times debt to Ebitda, S&P’s Fisher wrote in an Aug. 6 note.
“Given what we’ve got as the balance sheet today, the rating should be lower,” Thrivent Financial’s Hoppe said.
Agrium has $3.9 billion total debt for a debt-to-Ebitda ratio of 1.5 times at the end of the first quarter, according to data compiled by Bloomberg. Mosaic has the least debt with $1 billion total at the end of their last fiscal year for a ratio of 0.38 times, the data show.