July 22, 2016 - 5:02 PM EDT
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Fitch Affirms CF Industries at 'BBB'; Outlook Negative

Fitch Ratings has affirmed the Issuer Default Ratings (IDR) of CF Industries Holdings, Inc. (NYSE: CF) and CF Industries, Inc. (CF Industries) at 'BBB'. See the full list of ratings actions at the end of this release.

Debt in the amount of $5.6 billion and the $2 billion revolving credit are affected by this action.

The Rating Outlook has been revised to Negative from Stable.

KEY RATING DRIVERS

The Negative Outlook reflects the risk that prolonged weakness in the nitrogen fertilizer market may result in leverage above CF's target total debt/EBITDA range of 2.0x-2.5x beyond 2018. The outlook could be stabilized if Fitch expects FFO adjusted net leverage to return to the range of 2.0x-2.5x by the end of 2018.

Profitability

Despite expectations for lower ammonia prices, Fitch expects CF to generate operating EBITDA margins in excess of 30% and annual operating EBITDA of about $1.3 billion in 2016 and 2017.

CF terminated the merger transaction with certain of OCI N.V.'s businesses in May 2016 giving rise to a $150 million breakage fee. Fitch excludes the effect of transaction costs, project costs, gains and losses, and equity earnings/losses from its calculation of operating EBITDA.

Leverage

Fitch believes FFO adjusted net debt best reflects CF's leverage, since it captures distributions to CHS, Inc. and cash-build in advance of debt maturities. Fitch expects FFO adjusted net leverage to peak in 2016 at 4.4x, declining to below 2.5x between 2018 and 2019.

CHS STRATEGIC VENTURE

In February 2016 CHS purchased a minority interest in CF Industries Nitrogen, LLC (CF Nitrogen) for $2.8 billion. CHS is entitled to semi-annual distributions from CF Nitrogen as a result of its equity interest in 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. 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-ton capacity at market prices.

The $2.8 billion in proceeds provides sufficient liquidity support for CF's final year of project spending.

Cash Flow

Spending on expansion projects at CF's Port Neal, IA and Donaldsonville, LA facilities is expected to be completed by the end of 2016 and capital spending thereafter should drop to below $500 million. Fitch expects free cash flow to be negative by as much as $2 billion in 2016 but to be consistently positive thereafter in the range of $400 million-$500 million.

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 29% of its nitrogen consumption in 2015 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 remain relatively low in 2016 and 2017 on global oversupply before improving on better demand and supply rationalization.

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 2015, CF accounted for roughly 38% of the North American market for nitrogen fertilizers.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for CF Industries include:

--Fitch's natural gas price deck;

--Average prices roughly $225/ton in 2016 and 2017 and $235/ton in 2018;

--Capital spending below $500 million on average after 2016;

--Share-buybacks are suspended through 2017.

RATING SENSITIVITIES

Future developments that could lead to a stabilization of the outlook include:

--Expectations that FFO adjusted net leverage would be below 2.5x by the end of 2018.

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;

--FFO adjusted net leverage expected to be greater than 2.5x on a sustained basis.

Positive: Future developments (not expected in the next 12 months) that could lead to positive rating actions include:

--FCF (cash flow from operations less capital expenditures and dividends) grows faster than expected;

--FFO adjusted net leverage managed to below 1.5x on a sustained basis.

LIQUIDITY

As of March 31, 2016, CF had nearly $2.7 billion of cash on hand and nearly $2 billion available under the $2 billion unsecured revolving credit facility due September 2020 (after $5 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 manage its liquidity prudently during this period of high spending and low nitrogen fertilizer prices.

Liquidity is ample in consideration of the 2016 expected cash burn. CF has no scheduled debt due before the $800 million 6 7/8% notes are due May 2018. Fitch expects these notes to be repaid with cash on hand.

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'.

The Rating Outlook is Negative.

Additional information is available on www.fitchratings.com

Summary of Financial Statement Adjustments

Fitch has made no material adjustments that are not disclosed within the company's public filings.

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

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1009356

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1009356

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, +1-212-908-0579
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
David Cameli, +1-312-368-3160
Associate Director
or
Committee Chairperson
Mark Sadeghian, CFA, +1-312-368-2090
Senior Director
or
Media Relations
Alyssa Castelli, +1-212-908-0540 (New York)
[email protected]


Source: Business Wire (July 22, 2016 - 5:02 PM EDT)

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