November 3, 2016 - 4:57 PM EDT
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Fitch Rates CF Industries' Secured Debt 'BBB-/RR1'

Fitch Ratings has assigned a rating of 'BBB-/RR1' to CF Industries, Inc.'s pending secured revolving credit facility due 2020 (to be downsized to $750 million) and additional secured financing anticipated to be up to $1.3 billion. Proceeds of the new long-term secured debt in combination with revolver drawings and/or cash on hand is expected to fund a prepayment of the $1 billion in aggregate principal amount of senior notes due 2022, 2025 and 2027 together with the related make-whole payment estimated to be $210 million as of Oct. 31, 2016. A full list of ratings is at the end of this release. The Rating Outlook is Stable.

Fitch assigned an 'RR1' to first lien secured debt, notching up one from the Issuer Default Rating (IDR) and indicating outstanding recovery prospects (91%-100%) given default. Fitch assumes security for the revolver and additional secured debt is pari passu and limited to liens permitted under the unsecured note indentures without the need to grant pro rata security to the unsecured notes. The 'BB+/RR4' rating on unsecured notes reflects average recovery or 31%-50%.

On Oct. 18, 2016, Fitch downgraded the IDR of CF Industries Holdings, Inc. (NYSE:CF) and CF Industries, Inc. (CF Industries) to 'BB+' from 'BBB'. The downgrade reflected Fitch's view that weakness in the nitrogen fertilizer market is likely to persist into 2017 as a result of market oversupply. This sustained weakness followed by gradual recovery is expected to pressure operating results in the near term and drive elevated leverage through the next several years. Fitch expects funds from operations (FFO) adjusted net leverage above 2.8x through 2019.

The Stable Outlook reflects expectations of free cash flow (FCF) generation beginning in 2017 aided by expected tax refunds and lower capital requirements as well as sufficient liquidity.

PROFITABILITY

Despite expectations for lower ammonia prices, Fitch expects CF to generate average operating EBITDA margins in excess of 30% and annual operating EBITDA of at least $1 billion in 2017 and $1.3 billion in 2018.

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 mid-2017 at about 6x before declining to about 3x by the end of 2019.

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 annual capital spending thereafter should drop to below $500 million. Fitch expects FCF to be negative by at least $2.5 billion in 2016 but to be consistently positive thereafter and average in the range of $400 million-$500 million per annum.

CHS STRATEGIC VENTURE

In February 2016, CHS, Inc. purchased a minority equity 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 a supply agreement. The $2.8 billion in proceeds provided sufficient liquidity support for CF's final year of project spending.

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 tons capacity at market prices.

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 2017 on global oversupply before improving on better demand and supply rationalization. Fitch notes that recovery in domestic nitrogen fertilizer prices depends on capacity closures which would accelerate from strengthening in global energy prices. In particular, stronger APAC coal markets could accelerate closures and improve CF's cost position further.

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 U.K. 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 $205/ton in 2017, $219/ton in 2018, and $235/ton in 2019;

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

--No share-buybacks and no growth in dividends.

RATING SENSITIVITIES

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 $1.0 billion on average;

--FFO adjusted net leverage expected to be greater than 3.3x on a sustained basis.

Positive: Future developments, though 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 2.5x on a sustained basis.

LIQUIDITY

As of Sept. 30, 2016, CF had $1.55 billion of cash on hand. Fitch estimates nearly full availability under the $1.5 billion unsecured revolving credit facility due September 2020 (after $5 million utilization for letters of credit). This facility is to be downsized to $750 million and become secured. As with CF Industries' notes, CF Industries' revolver is guaranteed by CF.

The current $1.5 billion revolver contains two financial covenants: a minimum EBITDA/interest coverage ratio of 2.75:1.00 and a maximum net leverage ratio of 5.25x for the quarters ending Sept. 30, 2016, Dec. 31, 2016 and March 31, 2017; 5x for the quarter ending June 30, 2017; 4.75x for the quarter ending Sept. 30, 2017; 4x for the quarter ending Dec. 31, 2017; and 3.75x for periods after Dec. 31, 2017. 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 each have the same financial covenants as the revolver.

Fitch believes there could be pressure on the net leverage covenant by mid-2017. The amendment to the revolver and pre-payment of the private notes should alleviate this concern.

Liquidity is sufficient in consideration of the 2016 expected cash burn and expectations for future FCF generation. 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 assigns the following rating:

CF Industries, Inc.

--Senior secured debt and revolving credit facility 'BBB-/RR1'.

Fitch currently rates CF Industries Holdings, Inc. as follows:

--Issuer Default Rating (IDR) 'BB+'.

Fitch currently rates CF Industries, Inc. as follows:

--IDR 'BB+';

--Senior unsecured credit facility 'BB+';

--Senior unsecured notes 'BB+'.

The Rating Outlook is Stable.

Date of Relevant Rating Committee: Oct. 18, 2016.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)

https://www.fitchratings.com/site/re/885629

Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 05 Apr 2016)

https://www.fitchratings.com/site/re/879564

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1014307

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014307

Endorsement Policy

https://www.fitchratings.com/regulatory

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Source: Business Wire (November 3, 2016 - 4:57 PM EDT)

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