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.
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 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.
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 $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.
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 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.
LIQUIDITY
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.
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=1013330
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013330
Endorsement Policy
https://www.fitchratings.com/regulatory
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