DBRS Confirms A (low) Rating with Stable Trend on $140 Million New Debt Issue of Canpotex Limited

DBRS has today confirmed its rating of A (low) with Stable trend on Canpotex Limited’s (Canpotex or the Company) new debt issue consisting of US$25 million aggregate principal amount 3.679% Series 1A Senior Unsecured Notes due February 13, 2023; US$60 million aggregate principal amount of 5.103% Series 1B Senior Unsecured Notes due February 13, 2043; C$25 million aggregate principal amount of 3.217% Series 2A Senior Unsecured Notes due February 13, 2018; and C$30 million aggregate principal amount 4.215% Series 2B Senior Unsecured Notes due February 13, 2023 (collectively, the New Senior Unsecured Notes), which was assigned on a private basis following the pricing of the New Senior Unsecured Notes and our review of the Final Confidential Offering Memorandum dated February 6, 2013. Canpotex’s Issuer Rating has also been confirmed at A (low) with a Stable trend.

Canpotex is expected to use the net proceeds from the offering of the New Senior Unsecured Notes (1) to repay construction advances with respect to completion of Phase II of a port expansion at potash-handler, Neptune Bulk Terminals (Canada) Ltd. (Neptune), and a new Canpotex railcar maintenance and staging facility southwest of Lanigan, Saskatchewan; (2) for preliminary port expansion activities at Prince Rupert and at Canpotex’s subsidiary, Portland Terminals, located in Portland, Oregon; and (3) for general working capital purposes.

Canpotex’s ratings are underpinned by the flow-through nature of the organization, which allows it to purchase potash from its owners at a price based on the price the potash is sold less all costs properly incurred by Canpotex to deliver and sell the potash, including debt costs. As such, payments made to its shareholders for potash purchased provide a significant freeboard to absorb any unforeseen costs incurred in the marketing, delivery or financing of potash shipments or variation in the price of potash sales. In addition, Canpotex’s shareholders indemnify the Company for any expenses not covered by potash sales receipts including debt service expenses.

The rights and obligations of Canpotex shareholders/shippers Agrium Inc. (Agrium), Mosaic Canada Crop Nutrition, LP (Mosaic) and Potash Corporation of Saskatchewan Inc. (PCS) are well documented in a number of agreements, including the Canpotex shareholders’ agreement, which have been tested under many circumstances over many years and have facilitated the shipment of approximately 184 million tonnes of potash to market since 1972.

Canpotex provides its shareholders logistics efficiencies through economies of scale, operational expertise and shipment coordination. It is one of the two largest potash marketing and logistics organizations in the world and is positioned to continue to utilize its economies of scale to coordinate international shipments to all potash customers in the Canpotex markets. The Company has long-term access to key shipping and infrastructure assets while retaining the flexibility in agreements to reflect changing potash market conditions.

A softening of potash demand in the later portion of 2011 and in 2012, along with modestly lower prices, leads to DBRS’s expectation that Canpotex’s operating income will be lower in 2012. Capital expenditures are expected to include the added cost of the railcar facility completed during the year. As a result, DBRS expects Canpotex’s net free cash flow to decrease in 2012, despite increased potash handling capacity.

Over the longer term, Canpotex shareholders are expected by DBRS to complete significant increases in mine operating capacity. With a relatively mature North American potash market, the bulk of increased sales is expected to be international, increasing the volumes handled by Canpotex. Accordingly, Canpotex is examining options for increases in terminal and other logistics capacity that may require further external funding.

The New Senior Unsecured Notes have been issued pursuant to a trust indenture and related supplemental indentures for each series of New Senior Unsecured Notes (Trust Indenture) between Canpotex and Computershare Trust Company of Canada, as trustee. The New Senior Unsecured Notes will be unconditionally guaranteed by all of Canpotex’s existing and future wholly-owned subsidiaries (the Guarantors).

Canpotex’s obligations under the New Senior Unsecured Notes and under the related Trust Indenture will rank equally and rateably without any preference among holders of New Senior Unsecured Notes and with all of Canpotex’s other unsecured, unsubordinated obligations.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

DBRS has developed and utilized a credit-specific methodology published in Appendix I of our Base General Methodology for Corporate Companies, dated February 19, 2013.