09 October 2019 by jbchevrel
Potash is a general term referring to any potassium fertilisers used in agriculture. Potassium is a naturally occurring element which cannot be manufactured synthetically, and it is one of the most important plant nutrients, along with nitrogen and phosphate. That’s it for the chemistry lesson. K+S Aktiengesellschaft (SDFGR) is a German fertilizers manufacturer/marketer which serves both the agriculture and the industry, globally. SDFGR also produces salts, for different applications (de-icing, food, industry, chemistry). The name is a member of the XOver since s31. The recent falling potash prices highlighted SDFGR exposure to the commodity cycle. The 5y dec-24 CDS has widened from 180bp the week after the roll to 300bp now. Weak potash demand has led to production cuts across the industry and SDFGR has had to cut their earnings guidance, thus putting the company's deleveraging targets at risk. They were initially targeting to divide leverage by 2 by the end of 2020 (i.e. bet debt to ebitda below 3x from 6x in 2017), the ultimate goal being to go back to investment grade by 2023. S&P has cut the rating by one notch to BB- and said SDFGR must show leverage below 5x and free cash flow of at least €50m for an upgrade. Moody’s sounds less stringent than S&P but the IG bar is still high. They mentioned 4x leverage aim for an upgrade from current Ba2, also unlikely near term. From a cash flow standpoint, despite SDFGR capital spending expected to fall, free cash flow is likely to remain negative in 2019 for a 6th year. Liquidity-wise, they have ~€500m cash & cash equivalents on balance sheet and they managed to get, earlier this year, a new €960m 5y secured bank facility to ease upcoming refinancings. The previous credit line of €1b was due to expire in July 2020, and was renewed at favorable conditions in €800m. On top of it, a €160m 5y bullet loan was arranged. Going forward, their strategy is to re-focus on higher-margin goods. Potash isn’t one of those and the fact that new actors may enter the market soon (BHP) doesn’t bode well for this sector, in the future. Weather is, beyond potash prices, another key risk over which SDFGR has little control. For instance their 18 earnings were hit by the German drought. The fact they invested in new wastewater storage facilities (€400m) can help mitigate it next time.