Fitch Affirms Incitec Pivot Limited at 'BBB'; Outlook Stable <Origin Href="QuoteRef">IPL.AX</Origin>

(The following statement was released by the rating agency)SYDNEY/SINGAPORE, June 08 (Fitch) Fitch Ratings has affirmed Australia-based Incitec Pivot Limited's (IPL) Long-Term Issuer-Default Rating (IDR) and senior unsecured rating at 'BBB'. The Outlook is Stable. The senior unsecured notes issued by Incitec Pivot Finance LLC (IPF), due in 2019, are also affirmed at 'BBB'. IPF is a subsidiary of IPL and its debt is guaranteed by IPL and several of IPL's subsidiaries.The affirmation reflects Fitch's expectation that the commencement of the Louisiana ammonia plant and lower-cost gas supply contracts in Australia will improve IPL's profitability from the financial year ended 30 September 2017 (FY17). The improvement will bring IPL's credit metrics to levels commensurate with its ratings, despite the effects of the recent global commodity market downturn.KEY RATING DRIVERSCashing-In on Louisiana: Fitch expects IPL's Louisiana ammonia plant in the US to generate annual EBITDA of AUD15m in FY16 and AUD175m from FY17. This is lower than Fitch's previous assumptions of AUD60m and AUD290m, respectively, reflecting weaker forecast ammonia prices due to global commodity price falls.The main threat to the new cash flow is the declining gas to ammonia spread. Despite falling global ammonia prices, Fitch expects US natural gas prices to remain lower than those in Europe. This will lead to the continuation of wider ammonia production margins in the US, underlining the business case for the Louisiana investment. However, a portion of this risk is effectively hedged as up to 38% of the manufactured ammonia will be used internally by IPL to produce explosives.Strong Cost Position: IPL is a leading manufacturer (by tonnes produced) of industrial explosives in the US. It is also the second-largest marketer and distributor of explosives and top maker of fertiliser in Australia. These economies of scale put it at the lower-end of the global explosives and fertiliser cost curve, protecting its margins by the lower marginal costs large producers enjoy. Secured Australian Gas Supply: IPL has agreed a number of gas supply contracts at its Australian Phosphate Hill facility to negate the effect of rising natural gas costs on the east coast of Australia, which threatened to weaken IPL's cost positioning in fertilisers. The company expects the contracts to lower gas costs by around AUD20m a year from FY17 and a further AUD35m a year from FY19. Fitch expects IPL's costs to increase by AUD60m from FY19-FY20 relating to the maturity of gas supply contracts at IPL's Gibson Island production facility, should like contracts not be able to be agreed.Potential Sulphuric Acid Cost Increase: The risk relating to the loss of IPL's main source of low-cost sulphuric acid at Phosphate Hill has declined, following Mt Isa Mines in Australia obtaining the necessary environmental authority to operate to 2022. However, the threatened closure of Mt Isa illustrates the ongoing risks to IPL's strong cost position and margins. Exposure to Commodity Cycles: IPL's exposure to global commodity prices and cyclical mining and fertiliser markets was highlighted in its 1H16 results. The company reported that declines in urea and DAP fertiliser prices globally lowered its EBIT by around AUD78m in 1H16, while volume declines relating to mine closures and curtailments and insourcing of services lowered EBIT by around AUD12m, and dry conditions affecting fertiliser demand lowered 1H16 EBIT by around AUD13m. Fitch expects ongoing market weakness to lower IPL's profitability for the remainder of FY16.Foreign Currency Exposure: The depreciation of the Australian dollar against the US dollar helped IPL partially offset falling commodity prices in 1H16, while currency hedges in place to December 2019 continue to negate an increase in the translated value of IPL's outstanding US dollar-denominated debt. Fitch expects the step-change in profitability after IPL's Louisiana facility begins operations in 4Q16 to provide additional support to the company's US dollar-denominated debt, particularly post-payback of its USD850m Louisiana investment.KEY ASSUMPTIONSFitch's key assumptions within the rating case for the issuer include:- Australian dollar-US dollar exchange rate at 0.74 until FY19- prices for DAP, urea (NOLA and ME) and ammonia near the bottom of the market in FY16 and FY17. Urea and ammonia prices to recover from FY18, while DAP prices to recover from FY19- Louisiana plant to commence operations in 4Q16- capex of around AUD500m in FY16, AUD300m in FY17, AUD300m in FY18 and AUD200m in FY19- dividend payout ratio of 50% from FY16.RATING SENSITIVITIESNegative: Future developments that may, individually or collectively, lead to negative rating action include IPL's deleveraging not proceed in line with Fitch's expectations, such that:- the FFO-adjusted leverage remains above 3.0x (FY15: 2.9x) on a sustained basis, or- FFO fixed-charge cover remains below 4.5x (FY15: 4.7x) on a sustained basis.This may occur if there are delays in Louisiana or further significant cost increases in its Australian operations.Positive: Fitch expects IPL's FFO-adjusted leverage to fall below 3.0x on a sustained basis from FY17, following completion of its investment in Louisiana. As such, a ratings upgrade is unlikely in the next year. Fitch believes IPL's exposure to the more volatile fertiliser business will diminish once the facility starts, improving IPL's business risk profile. However, this could be negated by further acquisitions or shareholder-friendly activity, such as higher dividend payouts.Contact: Primary AnalystKelly Amato, CFAAssociate Director+61 2 8256 0348Fitch Australia Pty LtdLevel 15, 77 King St, Sydney NSW 2000Secondary AnalystHasira De Silva, CFADirector+65 6796 7240Committee ChairpersonVicky MelbourneSenior Director+61 2 8256 0325Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com.Additional information is available on www.fitchratings.comApplicable Criteria Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr _id=1005788Solicitation Status https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005788Endorsement Policy https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&det ail=31ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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