: Focus Emission

We understand that K+S will issue new senior unsecured notes to refinance its € 500m senior unsecured notes due in 2018. The amount could be the same or slightly higher, depending on investor appetite. In light of comparable bonds (see below) and anticipating a downgrade by S&P to ‘BB’ we recommend to subscribe at a yield north of:2.5% in case of a 6-year tranche or2.8% in case of a 7-year trancheSummary of the new unsecured issue /This would represent a meaningful increase compared with the YTW of the 2022 issue at 1.8%. 2016 came in more or less as we expected. K+S remains dependent on potash prices and salt volumes. Global potash prices stabilised in Q4 16, possibly marking a turning point for the industry. We notice that soft commodities have stabilised as well, but remain volatile. With Legacy coming online, additional potash sales volumes should help to expand this project’s absolute profit contribution after a ramp-up period. The Salt business unit remains divided, although we note that the Q4 16 winter was obviously better for K+S than in 2015. We value in our credit view the stable non-de-icing business. We believe that K+S will improve its earnings situation over time, helping to bring leverage back to a normal level. This constitutes our stable credit opinion at ‘BB’ for now. With our recommendation we consider also that a rating higher than our current credit opinion could appear. Thus we base our recommendation rather on a blended rating. Only more severe volume and price pressure in Potash and Magnesium, accompanied by low de-icing volumes, could challenge K+S’s viability in our view. While this cannot be ruled out, it appears too pessimistic. The world’s basic need for agricultural products, population growth and the effectiveness and low substitution risk of potash as a fertilizer actually provide a firm foundation for long-term growth, although bond investors with current maturities won’t fully benefit from these factors, but they help the company’s equity and credit stories. K+S’s recent successful € 700m promissory notes issue in 3-7y tranches at an average of 1% underlines the company’s benign funding situation in Germany, which offers plenty of bank and non-bank funding opportunities, although this issue was carried out before S&P’s downgrade to ‘BB+’.>