Fitch Ratings has upgraded Fertiglobe Plc's Long-Term Issuer Default Rating (IDR) and senior unsecured rating to 'BBB' from 'BBB-' and removed them from Rating Watch Positive. The Outlook is Stable. This follows the acquisition by Abu Dhabi National Oil Company (ADNOC) of a majority ownership in the company on 15 October 2024.

Fertiglobe's IDR is one notch above the company's Standalone Credit Profile (SCP) of 'bbb-' due to our assessment of its moderate strategic importance for ADNOC, under Fitch's Parent and Subsidiary Linkage (PSL) Rating Criteria. This reflects material growth prospects of clean ammonia as a fuel and hydrogen carrier, which fits into the hydrogen ambition and diversification strategy of ADNOC. We view ADNOC as stronger than Fertiglobe based on our assessment of strong linkage between ADNOC and its sole shareholder, Abu Dhabi (AA/Stable).

The SCP reflects Fertiglobe's strong cash flow generation from young assets that are strategically located to serve global ammonia and urea markets, and its competitive gas cost. Other rating strengths are its high margins and robust financial profile, which the company should be able to support despite gradual investments in clean ammonia.

Key Rating Drivers

Medium Strategic Incentive for ADNOC: We believe that Fertiglobe will be strategic in ADNOC's diversification and decarbonation strategy due to the prospects of ammonia use as a hydrogen carrier. ADNOC has earmarked USD23 billion to invest in lower-emissions solutions as part of its target to reach net zero by 2045. Ammonia vessel orders to be delivered by 2027, demand from the energy sector, and rising carbon costs in Europe will drive low-carbon ammonia demand growth. This will balance Fertiglobe's small size within ADNOC, leading to an overall medium strategic incentive to support.

Low Legal and Operational Incentives: We expect ADNOC to allow Fertiglobe to operate independently with its own management team, and it will not guarantee its debt.

ADNOC Supports Clean Ammonia: Fertiglobe plans to add 2 million tonnes (mt) of clean ammonia capacity in the UAE with moderate construction costs as the upstream part of these projects will be borne by partners. ADNOC intends to resell at cost to Fertiglobe its stakes in existing and future low-carbon ammonia projects when ready for startup, which includes a 30% stake in the first 1mt plant scheduled to be completed in 2027 and 100% of a second project expected for 2029.

This alleviates some pressure on Fertiglobe's balance sheet during construction, and will reinforce the asset base by growing scale and diluting exposure to Egypt and Algeria, and position Fertiglobe as a leader in the clean ammonia market.

Competitive Gas Contracts: Cheap gas cost under long-term contracts provides a competitive advantage that ensure high margins for Fertiglobe through the cycle. Its adjusted EBITDA margin peaked at 55% in 4Q21 and bottomed out at a still strong 31% in 2Q24 as ammonia and urea went from all-time highs to troughs. The current structure of contracts places its assets in the first or second quartile of global cost curves, ensuring profitable operations even when global prices are low, and capturing high margins when marginal producers' feedstock cost increase in greater proportions, as seen in 2021-2022.

Algerian Contract Uncertainty: Fertiglobe has yet to reach a new pricing agreement for gas in Algeria, which could influence the profitability of an asset that represents about one-third of total capacity. We believe that higher gas costs may be mitigated by lower profit-sharing.

Complex Profit-Sharing Structure: Fitch's EBITDA-based metrics capture dividend leakages to the minority shareholder of consolidated subsidiaries. In Algeria, a scheme provides the partner, Sonatrach, with a higher share of dividends than its 49% stake in the entity. This is booked as a cost in EBITDA, but the cash flow materialises in the following year when the dividend is paid. This distorts Fitch's leverage metrics due to the timing difference and calculation complexity. It also leads to cash-build up that will not be fully available for Fertiglobe, supporting Fitch's focus on gross debt metrics.

In 2023, the delayed payment of a USD813 million dividend to Sonatrach greatly distorted Fitch-calculated financial metrics, but should be viewed alongside the conservative leverage ratios in 2022 and over 2024-2027.

Conservative Financial Structure: Fertiglobe's current financial policy aims to balance a commitment to an investment-grade rating, with the optimisation of excess cash flow returns to shareholders. Gross debt increased to about USD1.7 billion in 2023 due to weaker performance and higher dividends to minorities than we expected. We now expect EBITDA gross leverage to exceed the negative rating sensitivity of 2x in 2024 and 2025 before returning to 1.8x in 2026 and 1.6x in 2027. We believe that ADNOC will maintain a conservative financial policy for Fertiglobe.

Focus on Commodity Exports: Fertiglobe's operations are focused on seaborne exports of nitrogen commodities, ammonia and urea, whose price and demand patterns are volatile. Moreover, fewer barriers to entry exist for ammonia and urea than in the phosphates or potash markets, given the availability of natural gas in many regions. Unlike peers, Fertiglobe is not integrated into downstream nitrates and has a narrower domestic market. This is mitigated by strategically located assets that enable it to serve all import markets at competitive shipping costs and duties.

Assets Concentrated in MENA: Fertiglobe's assets are located in Abu Dhabi (AA/Stable), Egypt (B-/Positive) and Algeria. The latter two jurisdictions have a higher risk of political and economic instability, but minority shareholders are government-related entities with incentives to ensure the viability of these assets. Fertiglobe operates eight production lines across MENA, which helps mitigate the risk of industrial footprint concentration.

Abu Dhabi Country Ceiling: We apply Abu Dhabi's Country Ceiling for Fertiglobe as EBITDA generated in Abu Dhabi is sufficient to cover Fertiglobe's hard-currency interest expense on a sustained basis.

Full commentary here.

-Ends-

Media Contact
Tahmina Pinnington-Mannan
Director, Corporate Communications
Fitch Group, 30 North Colonnade, London E14 5GN
tahmina.p-mannan@thefitchgroup.com

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