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 December 22, 2015 - 5:38 PM EST
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Fitch Affirms CF Industries at 'BBB'; Outlook Stable

Fitch Ratings has affirmed the Issuer Default Ratings (IDR) of CF Industries Holdings, Inc. (NYSE: CF) and CF Industries, Inc. (CF Industries) at 'BBB'. Fitch has also affirmed the ratings of CF Industries' unsecured revolving credit facility and senior notes at 'BBB'. The Rating Outlook is Stable.

KEY RATING DRIVERS

The Stable Outlook reflects Fitch's expectation that CF will manage to its target leverage range of 2.0x-2.5x during this period of high capital spending though total debt-to-EBITDA is expected to peak at about 3.7x in 2016 given less than full-year results from acquired companies.

COMPANY PROFILE

CF's ratings benefit from its position as the largest nitrogen fertilizer producer in North America and the second largest globally, as well as its position as one of the lower-cost producers globally, given the shale gas advantage. The company operates five nitrogen fertilizer production facilities in the U.S., two in Canada, and two in the UK. In 2014, the facilities in the U.S. and Canada combined have production capacity of 38%, 34%, 46% and 22% of North American ammonia, granular urea, UAN (urea ammonium nitrate solution) and ammonium nitrate, respectively.

INDUSTRY PROFILE AND OUTLOOK

The U.S. nitrogen fertilizer market benefits from corn's dominance for feed, fuel and export, nitrogen's impact on yield for the crop, the need to apply nitrogen annually, and the U.S. being structurally short of supply. The U.S. imported (net of exports) about 36% of its nitrogen consumption in 2014 and is likely to rely on imports even after planned projects add up to 5.1 million tons of gross ammonia capacity. Fitch believes ammonia prices will be softer in 2015 and 2016 given fewer plant outages combined with lower planted acres given high corn stocks.

CHS STRATEGIC VENTURE

In August 2015, CHS, Inc. announced that it will purchase a minority interest in CF Industries Nitrogen, LLC (CF Nitrogen) for $2.8 billion. CHS will be entitled to semi-annual profit distributions from CF Nitrogen based generally on the volume of granular urea and UAN purchased by CHS pursuant to the supply agreement.

Once CF's capacity expansion projects are completed, it will have total production of 18.9 million tons, exclusive of new capacity expected from the combination with OCI N.V. Under the supply agreement, CHS will have the right to purchase up to 1.7 million tons, or 8.9% of the 18.9 million tons capacity at market prices.

CF Nitrogen currently owns the Donaldsonville, LA, Port Neal, IA, and Yazoo City, MS production facilities. CF intends to contribute the Woodward, OK plant to CF Nitrogen prior to closing. The transaction is expected to close Feb. 1, 2016, subject to satisfaction of certain conditions.

The transaction provides CF with additional liquidity and fixed volume off-take and CHS with producer economics on fixed volume. Fitch views the transaction as credit-neutral in the long term.

CF OCI TRANSACTION

The companies agreed to combine CF with OCI's European, North American and Global Distribution businesses in a transaction valued at approximately $6.5 billion, based on CF's current share price, including the assumption of approximately $2 billion in net debt.

The transaction has a compelling strategic rationale. OCI's Wever project can be integrated into CF's existing distribution and logistics supply chain in North America providing operational synergies. OCI's Geleen operation along with GrowHow expands CF's European Operations. The transaction will also diversify product offerings into methanol, a complementary product with similar operations and economic drivers as nitrogen. CF expects operational and structural synergies to run about $500 million per annum after-tax.

The resulting capital structure is expected to be consistent with CF's target of 2.0x-2.5x total debt-to-mid-cycle EBITDA. The transaction is expected to close in 2016 after customary regulatory and shareholder approvals. Fitch views the transaction as rating-neutral in the short term.

EXPECTATIONS

Despite expectations for lower ammonia prices, Fitch expects CF to generate EBITDA margins in excess of 40% and annual EBITDA of about $2 billion in 2015 and 2016. Total debt-to-EBITDA is expected to peak in 2016 under 4x before dropping below 2.5x in 2017

CF is spending roughly $4.6 billion (of which $3.1 billion has been spent through Sept. 30, 2015) on expansion projects at its Port Neal, IA and Donaldsonville, LA facilities to increase production and product mix flexibility with planned completion during 2016. Fitch believes this will result in negative free cash flow (FCF) after capital expenditures and dividends for 2015 of about $1.7 billion. Fitch expects FCFs to be negative as much as $600 million in 2016 before capital spending drops and the company generates positive FCF.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for CF Industries include:
--The OCI combination announced Aug. 6, 2015 occurs by year-end 2016;
--The strategic venture with CHS announced Aug. 12, 2015 closes in the first quarter of 2016;
--Fitch's natural gas price deck;
--Prices near the bottom of the market and flat on average through the forecast period;
--$100 million of cash on hand is assumed to be necessary to run the business and not readily available for permanent debt repayment; and
--Share-buybacks are suspended through 2016.

RATING SENSITIVITIES

Positive: Future developments that, though not expected in the next 12 months, could lead to positive rating actions include:
--FCF (cash flow from operations less capital expenditures and dividends) grows faster than expected;
--Total debt-to-EBITDA managed to below 1.5x on a sustained basis.

Negative: Future developments that could lead to negative rating actions include:
--FCF expected to be negative beyond 2016;
--Available liquidity expected to be less than $1.5 billion;
--Total debt-to-EBITDA expected to be greater than 2.5x on a sustained basis.

LIQUIDITY

As of Sept. 30, 2015, CF had total liquidity of $2.9 billion, consisting of $943 million of cash and $2 billion available under the $2 billion unsecured revolving credit facility due September 2020 (after $4.9 million utilization for letters of credit). As with CF Industries' notes, CF Industries' revolver is guaranteed by CF.

The revolver contains two financial covenants: a minimum EBITDA/interest coverage ratio of 2.75:1.00 and a maximum total debt less unrestricted cash/EBITDA leverage ratio of 3.75:1.00. The $250 million 4.49% private notes due 2022, $500 million 4.93% private notes due 2025, and the $250 million 5.03% private notes due 2027 all have the same financial covenants as the revolver. Fitch expects CF to continue to operate well within its financial covenants.

Liquidity is ample in consideration of the 2015 and 2016 expected cash burn. CF has no scheduled debt due before the $800 million 6 7/8% notes are due May 2018.

FULL LIST OF RATING ACTIONS

Fitch affirms CF Industries Holdings, Inc. as follows:
--Issuer Default Rating (IDR) at 'BBB'.

Fitch affirms CF Industries, Inc. as follows:
--IDR at 'BBB';
--Senior unsecured credit facility at 'BBB';
--Senior unsecured notes at 'BBB'.

Additional information is available at www.fitchratings.com

Related Research:

Oil And Gas Price Assumptions (November 2015)

Applicable 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=869362
Related Research
Oil and Gas Price Assumptions November 2015
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=873427

Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=997262
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=997262
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Fitch Ratings
Primary Analyst
Monica M. Bonar
Senior Director
+1-212-908-0579
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Gregory Fodell
Associate Director
+1-312-368-3117
or
Committee Chairperson
Stephen Brown
Senior Director
+1-312-368-3139
or
Media Relations
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com


Source: Business Wire (December 22, 2015 - 5:38 PM EST)

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