DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Debt rating of Canpotex Limited (Canpotex or the Company) at A (low) with Stable trends. The confirmations primarily reflect the Company’s unique set of structural strengths, including the contractual commitments of its shareholders Mosaic Canada Crop Nutrition, LP (Mosaic LP), a wholly owned subsidiary of The Mosaic Company (Mosaic Co.), and Potash Corporation of Saskatchewan Inc. (PCS), a wholly owned subsidiary of Nutrien Ltd. (Nutrien), and its producers (Mosaic LP, PCS, and Nutrien subsidiary Nutrien (Canada) Holdings ULC (formerly, Agrium Inc.)), as well as implied support of its shareholders’/producers’ respective investment-grade ultimate parent companies (Mosaic Co. and Nutrien). The ratings remain supported by Canpotex’s exclusive right to export potash produced in Canada by its shareholders/producers or their respective affiliates that is destined for markets outside of Canada and the U.S.; its cost pass-through rights, covering all operating expenses, debt interest, and principal repayments; and its strong intermodal logistical infrastructure footprint. While potash markets are subject to significant volatility, the Company’s unique and superior structural strengths largely insulate it from these inherent price variances.
Financial performance in 2022 was exceptionally strong, driven by 150% higher year-over-year (YOY) sales
to $9.8 billion versus $3.9 billion in 2021. The sharp growth in revenues was due to a 125% YOY increase in implied average selling price of potash (ASP) and 11% higher YOY sales volume compared with 2021. Looking ahead, DBRS Morningstar expects 2023 sales revenues to be lower than the historical high of 2022 based on a lower expected implied YOY ASP somewhat offset by a higher projected YOY sales volume. In DBRS Morningstar’s view, the projected YOY decrease in implied ASP is due to market participants adjusting to the supply shock arising from the start of the Russia-Ukraine war in 2022. Although 2023 revenues are expected to be lower YOY, they should still be elevated relative to the historical levels owing to strong sales volume and a higher implied ASP relative to historical levels. This in turn reflects a strong demand backdrop and a tight supply environment owing to Russia’s war in Ukraine. DBRS Morningstar expects that expenses could also trend lower as supply chain issues and freight costs ease up. Overall, DBRS Morningstar believes that the revenue-to-total expense ratio metric (DBRS Morningstar calculated) should remain strong relative to historical standards. Thus, DBRS Morningstar expects Canpotex’s financial risk profile to remain very robust.
The addition of hundreds of new railcars in 2022 continued to support growth and efficiency. Certain sustainment capital spending at the Neptune terminal facilities in Vancouver, British Columbia, and the Portland Bulk terminal facilities in Portland, Oregon, which accounted for 61% and 20% of volumes in 2022, respectively, continues to support reliable operations. Therefore, DBRS Morningstar anticipates that the Company’s business risk profile should improve incrementally during 2023 and beyond.
DBRS Morningstar would likely not consider a negative rating action unless there are material changes in the Company’s structural business strengths, which rely on the underlying operating and contractual structures. These are weighted more heavily in comparison to the financial metrics for Canpotex versus more typical corporations. DBRS Morningstar would consider a positive rating action only if the Company were to materially improve its already very strong business risk profile. DBRS Morningstar does not foresee any developments in the near term that might be a catalyst for such a material strengthening.
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929 (May 17, 2022).
All figures are in U.S. dollars unless otherwise noted.
DBRS Morningstar applied the following principal methodology:
-- General Corporate Methodology: Appendix 1 – Canpotex Limited (March 22, 2023) https://www.dbrsmorningstar.com/research/411487/general-corporate-methodology
The following methodologies have also been applied:
-- DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (March 28, 2023) https://www.dbrsmorningstar.com/research/411694
The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorning-star.com/about/methodologies.
A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.
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