Fitch Affirms CF's IDR at 'BBB'; Outlook Revised to Negative
CHICAGO -- December 19, 2013
Fitch Ratings has revised the Rating Outlook for CF Industries Holdings, Inc.
(CF Holdings) and CF Industries, Inc. (CF) to Negative from Stable and
affirmed the Issuer Default Ratings (IDR) of CF Holdings and CF at 'BBB'.
Fitch has also affirmed the ratings of CF's unsecured revolving credit
facility and senior notes at 'BBB'.
KEY RATING DRIVERS
The Negative Outlook is driven by the company's recent announcement that it
intends to issue up to $1.5 billion in additional debt. That amount of debt
would bring CF's total debt to $4.6 billion, well above Fitch's rating
sensitivity of $3.5 billion. The proceeds from the issuance would likely be
used for share repurchases. Further, management stated that it is studying the
Master Limited Partnership (MLP) structure. 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 by 2016. CF has spent over $400 million through Sept. 30, 2013
($286 million in the first nine months of 2013) on the projects and is likely
to spend a total $0.6 billion on them in 2013. 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 $2.3 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 an asset retirement obligation
escrow). The deal is subject to regulatory approval and is anticipated to
close in mid-2014.
Supporting CF's ratings is ongoing strong demand for corn and the nitrogen
fertilizers needed to grow it. Farm economics are very 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 gross margins north of 40% compared to
24% in 2007. 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 $2.9 billion LTM ended Sept. 30, 2013.
CF's credit metrics are currently strong with total debt-to-EBITDA of 1.1x for
the LTM period ended Sept. 30, 2013. CF's interest coverage was 17.6x 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.
CF has a substantial liquidity position of $3.3 billion, consisting of its
$2.3 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 its $800 million 6 7/8% notes due 2018.
Positive: Future developments, though not expected in the next 12 months, that
could lead to positive rating actions include:
--FCF (after 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
--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
--Total debt-to-EBITDA is greater than 2.5:1.0.
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
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Christopher M. Collins, CFA
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Sean T. Sexton, CFA
Brian Bertsch, +1-212-908-0549 (New York)
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