Investing.com -- S&P Global Ratings has downgraded the rating of U.S.-based salt and specialty fertilizer producer Compass Minerals International (NYSE:CMP) Inc. to ’B’ from ’B+’, citing higher leverage and a contraction in EBITDA. The company’s debt rating has also been lowered due to an increase in debt by about 20% over the past five quarters ending December 31, 2024.
The ratings agency anticipates that Compass Minerals’ EBITDA will contract by about 15%-20% in fiscal 2025 due to higher unit costs in the salt segment and expected lower prices in both the plant nutrition and salt segments. Consequently, S&P Global Ratings expects the company’s leverage to exceed 5x in fiscal 2025, potentially leading to sustained negative free cash flow generation, a trend that has persisted over the past two fiscal years.
Alongside the downgrade, the issue-level rating on the company’s senior secured debt has been lowered to ‘BB-’ from ‘BB’ and on the senior unsecured notes to ‘B-‘ from ‘B’. However, the ‘1’ and ‘5’ recovery ratings on the senior secured debt and senior unsecured debt remain the same.
The stable outlook reflects S&P Global Ratings’ expectation that Compass Minerals will begin to realize the benefits of some recently implemented operational initiatives that could reduce the free cash flow deficits and curb the deterioration in its leverage metrics.
In fiscal 2025, Compass Minerals’ EBITDA and margins are expected to contract as the company manages its working capital. The company is predicted to generate adjusted EBITDA of $150 million-$180 million, a contraction of at least 14% compared with fiscal 2024. This contraction is attributed to the company working through higher-cost inventory over the next 12 months and lower selling prices and volumes due to unfavorable results from the 2024/2025 North American Highway de-icing bid season.
The company’s adjusted debt increased by about 17% in fiscal 2024 as it financed cash flow deficits by drawing on its revolving credit facility. The company has generated negative free cash flows over the past two fiscal years due to a combination of weaker-than-expected earnings and higher capital expenditure.
Compass Minerals may require further amendments to its credit agreement to maintain sufficient liquidity sources. The company has executed two amendments to the credit agreement over the past 12 months to provide flexibility in its financial covenant requirements. The company will have covenant headroom of less than 15% room under its interest coverage covenant ratio of 2x, which S&P Global Ratings considers to be insufficient to avoid a potential breach.
Recent operational initiatives could lead to a recovery in cash flow and profitability over the next 24 months. Compass Minerals has scaled back production at its Goderich mine and reduced headcount last fiscal year as it attempted to right-size its operations and generate cash flows under all-weather scenarios.
The stable outlook reflects S&P Global Ratings’ expectation that Compass Minerals’ leverage will remain elevated in the 6x-7x range over the next 12 months as the company deals with lower-margin inventory and implements initiatives to right-size its operations.
S&P Global Ratings could lower its rating on Compass Minerals if it no longer expected its earnings and leverage to recover in fiscal 2026 due to market weakness or operational challenges. Conversely, the rating could be raised over the next 12 months if its leverage strengthened below 4x, restoring some cushion in its credit metrics to deal with earnings volatility.
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