Fitch Ratings has assigned Uzkimyosanoat (UKS) a first-time 'BB-' Long-Term Issuer Default Rating (IDR) with a Stable Outlook. This rating is on par with that of its parent, Uzbekistan, which has a sovereign rating of 'BB-' with a Stable Outlook.
UKS, a fully state-owned producer of fertilizers and other chemicals, boasts strong ties with the government, making it a key player in Uzbekistan's chemical industry.
Fitch's assessment of UKS's Standalone Credit Profile (SCP) is 'b,' reflecting various factors that include its domestic market-leading position, small scale, challenges associated with an ambitious capital expenditure program, high but improving leverage, and the overall challenging operating environment in Uzbekistan.
Here's a closer look at the key rating drivers and considerations:
Government-Related Entity (GRE) Considerations: UKS's rating is aligned with that of Uzbekistan, in line with Fitch's Exposure Draft: Government-Related Entities (GRE) Rating Criteria. Fitch believes that government support for UKS is highly likely, given its fully state-owned status.
The decision-making and oversight for UKS are deemed 'Very Strong' since it is wholly state-owned, with high-level strategies and investments set by the government through presidential decrees. Notably, the board of directors comprises Uzbek government ministers.
Support Incentives: The preservation of the government policy role factor is considered 'Strong' since UKS primarily produces fertilizers vital to the Uzbek economy. Furthermore, UKS has embarked on an ambitious investment program aimed at reducing imports of non-fertilizer chemical products and diversifying its production to higher-value added items.
Fitch views UKS's debt as a proxy for the government's debt, despite its minimal external debt. A potential default by UKS could affect the government's access to financing, raising the cost of borrowing for the government and other GREs. This is assessed as 'Strong' for contagion risk.
Ambitious Investment Plans and Execution Risks: UKS has ambitious investment plans of $709mn over 2023-2028, including the construction of three chemical clusters, with additional foreign direct investment. The success of these projects depends on funding, with execution risks given the large scale of these initiatives and UKS's limited access to capital without government guarantees.
Asset Sales: UKS plans to divest shares in 'Birinchi rezinotexnika zavodi' and Fargonaazot in 2023, with proceeds of approximately $150mn. The company also intends to divest its potash and phosphorite business by 2024, contingent on market conditions. The successful divestment of the potash and phosphorite business is factored into Fitch's forecast.
Fitch anticipates a reduction in EBITDA gross leverage from 6.4x in 2021 to an average of 4x in 2023-2026. This improvement is attributed to comprehensive plant modernization and upgrades completed in 2021. These enhancements have improved efficiency and EBITDA margins.
Medium-Sized Diversified Producer: Fitch considers UKS a medium-sized fertilizer producer with the unique distinction of being the only producer in Central Asia that manufactures all three main nutrient types. Although it has a domestic market share of approximately 30%, it enjoys a dominant position in the Central Asian region, thanks to limited competition, enabling it to command premium prices in the export market.
Medium Cost Position: UKS's cost position places it in the third quartile of the global cost curve for ammonium nitrate. While historically enjoying relatively low natural gas prices due to state subsidies, UKS is exposed to operational interruptions during energy shortages, as gas is a key feedstock and source of electricity generation.
Fitch anticipates Uzbekistan's GDP growth to be 5.9% in 2023, underpinning the demand for UKS's products, which are closely tied to GDP growth. However, Uzbekistan's economic stability is balanced by exposure to geopolitical risks, high inflation, energy shortages, and weak governance.
UKS's corporate governance, similar to other state-controlled companies in Uzbekistan, is evolving. UKS has started publishing annual IFRS financials, although interim results are not available.
Liquidity and Debt Structure: UKS's liquidity relies on cash on its balance sheet and divestment proceeds, with a cash balance of approximately $37mn as of end-June 2023. However, UKS is subject to foreign-currency risk, as 80% of its debt is in US dollars or Japanese yen while most of its revenue is in Uzbek som.
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