NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded the Issuer Default Ratings (IDR) of CF Industries Holdings, Inc. (NYSE: CF) and CF Industries, Inc. (CF Industries) to 'BB+' from 'BBB'. See the full list of rating actions at the end of this release.
Debt in the amount of $5.6 billion and revolving credit facility commitments of $1.5 billion are affected by this action.
The Rating Outlook has been revised to Stable from Negative.
The downgrade reflects 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 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.
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.
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.
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 year.
CHS STRATEGIC VENTURE
In February 2016, CHS, Inc. purchased 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 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.
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.
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;
--No share-buybacks and no growth in dividends.
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 billion on average;
--FFO adjusted net leverage expected to be greater than 3.3x on a sustained basis.
Positive: Future developments, although 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.
As of June 30, 2016, CF had $2 billion of cash on hand and nearly $1.5 billion available under the $1.5 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 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. Fitch expects CF to manage its liquidity prudently during this period of low nitrogen fertilizer prices.
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 downgraded CF Industries Holdings, Inc. as follows:
--Issuer Default Rating (IDR) to 'BB+' from 'BBB'.
Fitch downgrades CF Industries, Inc. as follows:
--IDR to 'BB+' from 'BBB';
--Senior unsecured credit facility to 'BB+/RR4' from 'BBB';
--Senior unsecured notes to 'BB+/RR4' from 'BBB'.
The Ratings Outlook is Stable.
Additional information is available on www.fitchratings.com.
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 05 Apr 2016)
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