Fitch Expects to Rate Iowa Finance Authority's Proposed Midwestern Disaster Area Rev Bonds 'BB-'

CHICAGO--()--Fitch Ratings expects to assign a 'BB-' rating with a Stable Outlook to approximately $1.194 billion of proposed Midwestern Disaster Area Revenue Bonds to be issued by the Iowa Finance Authority on behalf of Iowa Fertilizer Company LLC (IFCo).

The final ratings are contingent upon the receipt by Fitch of executed documents and legal opinions conforming to information already received and reviewed as well as the final pricing of the bonds. The bonds are expected to price on April 29, 2013 and the proceeds will be used to pay for the construction of the fertilizer plant and certain infrastructure improvements, capitalized interest, a deposit to the debt service reserve fund, and associated financing fees.

KEY RATING DRIVERS

--Nitrogen Market Price Exposure: IFCo will sell its nitrogen products to farmers, distributers, and blenders at market prices. The project's main products have historically exhibited considerable price volatility as evidenced by the average 5 - and 10-year one standard deviation ranges of 25% - 30% and 35%, respectively. However, Fitch believes that IFCo will benefit from a favorable pricing environment in the medium-term, but recognizes that a shift in the supply-demand balance could negatively impact prices. Fitch forecasts that a 10% change in nitrogen product prices will result in a 0.40x - 0.50x change in debt service coverage ratios (DSCRs).

--Natural Gas Price Risk: The project will procure its natural gas feedstock via an existing pipeline at prices linked to Henry Hub. IFCo has entered into natural gas call swaptions for the first seven years of the project with a strike price of $6 and $6.50 per mmBtu to moderate gas price risk. In addition, the project will fund from operations, over seven years, an annual $25.8 million reserve requirement to provide liquidity and help mitigate price risk during the non-hedging period.

Alternatively, IFCo can enter into call swaptions at a $7 per mmBtu strike price during part or all of the final three years of the debt term. Fitch believes that the call swaptions and hedging reserve moderate natural gas price risk and forecasts that DSCRs change by 0.10x - 0.15x for every $1 per mmBtu price movement.

--Manageable Operating Risks: IFCo will utilize commercially proven technologies with relatively low maintenance risk. The independent engineer (IE) opined that the non-feedstock O&M and major maintenance costs were reasonable and forecasted technical operating performance was achievable. Further, Fitch believes that the project's oversized production capacity helps mitigate operating performance risk.

--Strong Completion Arrangement: The fixed-price, turn-key, date-certain, fully-wrapped engineering, procurement, and construction (EPC) agreement with an experienced contractor that has delivered similar projects on-schedule and on-budget substantially mitigates construction risk. Fitch considers the credit quality of the EPC contractor to be below that of the project, but does not view this as a rating constraint. Fitch believes that the structural features of the EPC contract and financing agreements, use of conventional technology, availability of substitute contractors, favorable IE opinion regarding construction costs, and potential for sponsor support, albeit uncommitted, help mitigate counterparty risk.

--Speculative-Grade Forecasted Financial Profile: The Fitch rating case forecasts average and minimum DSCRs of 1.16x and 1.06x, respectively. Fitch believes that the project exhibits an ability to endure a combination of financial and performance stresses, but views the exposure to margin risk as a rating constraint. While natural gas price exposure has been moderated, the nitrogen fertilizer price remains subject to the U.S. trade balance, cost of production, and changes in supply and demand. Fitch recognizes that the debt term moderates long-term price uncertainty and reserve accounts help to mitigate the impact of short-term price fluctuations, but the cash flow cushion provides a limited margin of safety.

RATING SENSITIVITIES:

--Nitrogen Market Prices: Fundamental shift in the supply-demand balance that results in a materially different nitrogen market pricing environment than forecasted

--Higher Cost Profile: Higher than expected natural gas market prices or an inability to effectively manage operating costs

--Reduced Operational Capabilities: Failure to reach and sustain projected capacity and utilization rates

--Heightened Completion Risk: Material increases in costs or delays during construction

SECURITY

First priority security interest in all tangible and intangible assets of the project and a pledge by Iowa Holding LLC of its membership interests in IFCo.

TRANSACTION SUMMARY

IFCo was formed to develop, construct, operate, and own a $1.8 billion greenfield nitrogen fertilizer facility in southeast Iowa. The project will have up to 2.2 million short tons of flexible capacity to produce ammonia, urea, urea-ammonium nitrate, and diesel exhaust fluid (DEF). The project has entered into a fixed-price, turn-key, date-certain, fully wrapped EPC contract with Orascom E&C USA. The EPC contractor's obligations are unconditionally guaranteed by its parent OCI Construction Holding, a wholly-owned affiliate of OCI N.V. IFCo will sell its products to farmers, distributors, and blenders at market prices. The project will be connected directly to the ANR pipeline and pay prices linked to Henry Hub. The project will enter into hedging arrangements for approximately 50% of its natural gas cost exposure using call swaptions for the first seven years at $6 per mmBtu in years one to three and $6.50 per mmBtu in years four to seven.

The Fitch base case represents Fitch's expected performance for IFCo. The Fitch base case uses a production ramp-up at the commencement of operations and assumes scheduled turnarounds every four years beginning in 2019 consistent with management's estimate and the IE opinion. Fitch believes the forecasted ammonia and downstream plant capacity levels and conversion yield estimates are reasonable. The IE verified that the capacity and conversion yield assumptions are reasonable and achievable.

Fitch utilized 2015 nitrogen fertilizer prices generally consistent with the post-Energy Independence and Security Act historical average with a long-term growth rate of 2.75% to capture the impact of inflationary adjustments and modest demand increases. The DEF price was linked to the forecasted urea price plus a premium. Fitch's annual base case projections for the Henry Hub market price of $4.22 - $7.55 per mmBtu were used to forecast the effective all-in price of natural gas. Management's operating and capital cost estimates were maintained based on feedback from the IE. The Fitch base case average and minimum DSCRs are 2.61x and 2.39x, respectively.

The Fitch rating case applies a combination of uncorrelated operational and financial stress to the Fitch base case to reflect the potential results that are reasonably likely to occur occasionally, but not persist during the life of the project financing.

The Fitch rating case incorporated a 2.5% utilization rate haircut for all years that may occur due to operational issues. Operating and capital costs were increased by 10% in all years to reflect the potential volatility of occasionally higher cost requirements for a new fertilizer project. The Fitch base case natural gas prices were increased by $1.50 per mmBtu given IFCo's exposure to market price movements. Additionally, the base case nitrogen fertilizer prices were reduced by 25% to reflect the volatility in market prices based on the lower end of the average historical one standard deviation change in prices. Similar to the Fitch base case, DEF prices were linked to forecasted urea prices plus a premium. The Fitch rating case average and minimum DSCRs are 1.16x and 1.06x, respectively.

Fitch completed additional financial analyses to review the probability of default, which will be provided in the Fitch presale report.

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

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance' (July 11, 2012).

Applicable Criteria and Related Research

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=789465

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Contacts

Fitch Ratings
Primary Analyst
Dino Kritikos, +1 312-368-3150
Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Andy Joynt, +1 212-908-0842
Associate Director
or
Committee Chairperson
Greg Remec, +1 312-606-2339
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Dino Kritikos, +1 312-368-3150
Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Andy Joynt, +1 212-908-0842
Associate Director
or
Committee Chairperson
Greg Remec, +1 312-606-2339
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com