K+S Calls Moody’s Credit Downgrade to Junk Incomprehensible

K+S AG, the worst performer on Germany’s benchmark DAX index this year, said the decision of Moody’s Corp. to downgrade the potash producer’s credit rating to junk is incomprehensible.

K+S has a cash position of more than 1.2 billion euros ($1.6 billion) and an unused credit line of more than 1 billion euros, Michael Wudonig, a spokesman for the Kassel, Germany-based company, said in an e-mail today. The stock dropped the most in six weeks in Frankfurt trading.

Moody’s yesterday downgraded K+S’s debt two levels to Ba1, one grade below investment, from Baa2. The credit rating company said the move was triggered by the German producer’s decision to proceed with investment in its greenfield potash mine, Legacy, and the resulting deterioration of the company’s financial profile

“The higher indebtedness caused by the Legacy Project is only of temporary nature,” K+S’s Wudonig said in the e-mail. The company can reduce indebtedness again once Legacy has started production, he said.

The shares fell as much as 5.2 percent, the biggest intraday drop since Sept. 24, to 19.74 euros. The stock was trading down 3.4 percent at 20.11 euros as of 11:19 a.m. local time. Today’s decline brings the stock’s loss since the beginning of the year to 43 percent. The market value is 3.8 billion euros.

K+S remains convinced that it will remain able to tap capital markets if needed, Wudonig said today. The company is considering a hybrid bond to raise one-third of the investment, or about $1.4 billion, for Legacy in Canada, Chief Financial Officer Burkhard Lohr told analysts at a meeting on Oct. 7.

Greater Scrutiny

The German miner’s business model has been under scrutiny since competitor OAO Uralkali said July 30 that the fertilizer’s price may tumble to less than $300 a ton from more than $400 as the Russian company ramps up production to full capacity. K+S is forecasting that potash prices will bottom out in the last three months of this year and rise again in 2014, Lohr told the analysts.

Moody’s said yesterday that its rating assumes a potash price of about $350 a ton with some risk that it will drop in 2014. Lower selling prices mean that K+S won’t be able to generate as much cash in the medium term, Moody’s said.

The German company’s debt is rated BBB+ at Standard & Poor’s, the third-lowest investment grade, and the credit-reporting company has a negative watch on K+S, meaning it may downgrade the debt.