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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