Fitch Rates CF's Proposed $1.5B Notes 'BBB'; Outlook Negative

CHICAGO--()--Fitch Ratings assigns a 'BBB' rating to CF Industries, Inc.'s (CF) proposed $1.5 billion notes with likely tenors of 10, 20 and 30 years. The Rating Outlook is Negative. A full list of ratings follows at the end of this release.

NOTES

The notes will be senior unsecured obligations and will rank equally with the existing $3.1 billion of notes issued by CF Industries, Inc. The company's notes will be guaranteed by CF Industries Holdings, Inc. (NYSE: CF). The company plans to use the net proceeds for general corporate purposes including share repurchases. The notes are being issued under the company's indenture dated May 23, 2013. Key covenants include restrictions on secured debt, sale and leaseback transactions, and mergers and asset sales. There are no financial covenants. The notes will have make whole call provisions. The notes also feature a put option upon a change of control and a downgrade of the notes below investment grade.

KEY RATING DRIVERS

Fitch affirmed CF's ratings on Dec. 19, 2013 and revised the Rating Outlook to Negative from Stable. The Negative Outlook is driven by this issuance of $1.5 billion in additional debt, which will bring CF's total debt to $4.6 billion, well above Fitch's previous rating sensitivity of $3.5 billion. The proceeds from the issuance are likely to be used for share repurchases. In addition, while management ruled out placing all the company's assets into a Master Limited Partnership (MLP) structure, it continues to study MLPs. A change to an MLP structure, which often includes greater distributions, could be credit negative.

Concurrent with the share repurchases, CF is spending heavily on expansion projects at its Port Neal, IA and Donaldsonville, LA facilities. The company plans to spend a total of $3.8 billion to expand those facilities with planned completion in 2016. CF has spent over $477 million through Dec. 31, 2013 ($356 million in 2013) on the projects. CF expects to spend $2.5 billion in capital expenditures in 2014, $2 billion of which will be for expansions, which will lead to significant negative free cash flow (FCF), which Fitch anticipates could be as much as $1.5 billion.

Somewhat mitigating the cash outflow is the company's $1.7 billion in cash balances and expected roughly $1 billion in net proceeds from its divestiture of its phosphate operations. In October, CF agreed to sell its phosphate operations to The Mosaic Company for $1.4 billion in total consideration ($1.2 billion for the operations and $200 million for the asset retirement obligation fund). The deal is subject to regulatory approval and is anticipated to close in the first half of 2014.

Supporting CF's ratings is ongoing strong demand for corn and the nitrogen fertilizers needed to grow it. Farm economics are healthy with the demand for grains being pulled by population growth and corn-for-ethanol to meet renewable fuel requirements. Low-cost natural gas, the feedstock used to manufacture ammonia, has pushed CF's EBITDA margins north of 50% compared to 32% in 2008. However, nitrogen fertilizer prices have come down from highs reached in 2012 as corn prices have declined below the five-year average. As a result, farmers are expected to plant fewer acres in 2014, down from 95 million acres this past year, per the USDA. Fitch expects CF's operating EBITDA to be less robust in 2014, and forecasts operating EBITDA of $2.2 billion in 2014 versus $2.8 billion for the year ended Dec. 31, 2013.

CREDIT METRICS

CF's credit metrics are currently strong with total debt-to-EBITDA of 1.1x for the year ended Dec. 31, 2013. CF's interest coverage was 15.6x over the same period. However, CF's credit metrics are expected to weaken with the planned debt offering and lower forecast EBITDA. Fitch forecasts total debt-to-EBITDA of 2.1x in 2014.

LIQUIDITY

CF has a substantial liquidity position of $2.7 billion, consisting of its $1.7 billion of cash and $1 billion undrawn unsecured revolving credit facility. The revolver matures in May 2018, and, as with CF's existing bonds, the revolver is guaranteed by CF Holdings. The revolver contains two financial maintenance tests: 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. CF has and is expected to maintain an adequate cushion with respect to its financial covenants. CF has a favorable maturity schedule with its first large maturity being its $800 million 6 7/8% notes due 2018.

RATING SENSITIVITIES

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 capex and dividends) grows faster than expectations;

--Debt/EBITDA returns below 1.5:1.0 through the business cycle.

Negative: Future developments that could lead to negative rating actions include:

--A change to an MLP structure with significantly higher cash distributions;

--Significant cost overruns on the company's capital projects;

--FCF is negative beyond 2015;

--Liquidity is significantly eroded;

--The demand for nitrogen-based fertilizers suffers a very sharp and sustained reduction;

--Total debt-to-EBITDA is greater than 2.5:1.0.

Fitch currently rates CF as follows:

CF Industries Holdings, Inc.

--Long-term IDR 'BBB'.

CF Industries Inc.

--Long-term IDR 'BBB';

--Revolving credit facility 'BBB';

--Senior unsecured notes 'BBB'.

The Rating Outlook is Negative.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Relevant Research:

--'Corporate Rating Methodology' (August 2013).

Applicable Criteria and Related Research:

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=822780

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Contacts

Fitch Ratings
Primary Analyst:
Christopher M. Collins, CFA, +1-312-368-3196
Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Sean T. Sexton, CFA, +1-312-368-3130
Managing Director
or
Committee Chairperson:
Jason Pompeii, +1-312-368-3210
Senior Director
or
Media Relations:
Brian Bertsch, New York, +1 212-908-0549
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst:
Christopher M. Collins, CFA, +1-312-368-3196
Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Sean T. Sexton, CFA, +1-312-368-3130
Managing Director
or
Committee Chairperson:
Jason Pompeii, +1-312-368-3210
Senior Director
or
Media Relations:
Brian Bertsch, New York, +1 212-908-0549
brian.bertsch@fitchratings.com