Biggest Iowa Borrowing Fueled by Natural-Gas Plunge: Muni Credit

A 75 percent drop in natural-gas prices since 2008 and demand for fertilizer from Iowa’s farms are powering the top U.S. corn producer’s biggest municipal bond sale in almost four decades.

The Iowa Finance Authority plans to offer $1.2 billion in debt as soon as today to help fund the construction of a $1.4 billion nitrogen fertilizer plant in the southeastern part of the state by Orascom Construction Industries (OCIC), Egypt’s biggest publicly traded company.

The project is the state’s second-largest private investment. After neighboring Illinois tried to lure the venture, Iowa made its incentives package the largest it’s given, at $59.1 million. States competing for revenue offer more than $11 billion annually in tax credits, grants, loans and reimbursements to spur employment, according to a report from Good Jobs First, a Washington nonprofit.

“This project not only creates jobs in an area of our state that really needs it, it is also helpful to the farmers,” said Tina Hoffman, a spokeswoman in Des Moines for the Iowa Economic Development Authority, which awarded the credits. “To be able to check those boxes all at the same time with one project is a big deal.”

Timing Benefits

The venture will benefit from the lowest yields in a generation in the $3.7 trillion muni market. The debt will be sold into the short-term market as tax-exempt securities due in one year and rated AAA yield 0.2 percent, about one-third below the average since 2009, data compiled by Bloomberg show.

The plant, Orascom’s second in the U.S., will be near Wever, in a county along the Mississippi. It will also take advantage of a decline in the price of natural gas, a fertilizer component, as supply has increased from hydraulic fracturing. Natural gas traded on the New York Mercantile Exchange is down about three-quarters from the 2008 high of $13.694 per million British thermal units.

Orascom isn’t alone in tapping this market. CF Industries Holdings (CF), a manufacturer and distributor of fertilizer based in Deerfield, Illinois, is embarking on a $1.7 billion expansion of a plant in Sioux City, Iowa. The plan, announced in November, surpassed the Orascom project as the state’s biggest private investment, Hoffman said.

Farmers’ Savings

Iowa is the biggest corn-producing state and the largest consumer of nitrogen-based fertilizer, according to Orascom. Omar Darwazah, Orascom’s investor relations manager in Cairo, declined to offer an immediate comment on the project.

Farmers in the Hawkeye State will save $749 million annually from cheaper local fertilizer prices when the Orascom plant is running, after an anticipated completion in 2015, said Hoffman.

To help fund construction, the finance authority is acting as a conduit for the enterprise, locally called the Iowa Fertilizer Company, to sell Midwestern Disaster Area bonds. The securities were created to promote economic recovery in Iowa counties declared disaster areas in 2008 after floods and tornados.

The program is available until Jan. 1, and with the issuance the state will have used its $2.6 billion allocation, said Lori Beary, community development director for the authority in Des Moines.

38 Years

The $1.2 billion deal would be the biggest from an issuer in the state since at least 1974, data compiled by Bloomberg show.

The proceeds will be invested in securities issued by the U.S. Treasury and held in escrow until they’re used to buy the debt from holders April 12, according to the offering statement. The notes are rated A-1+, Standard & Poor’s top short-term rating. The company will remarket the debt and be responsible for payments to bond holders, Beary said.

The borrowing may absorb cash from maturing securities, said Jim Colby, who helps oversee $2 billion as senior muni strategist and portfolio manager at Van Eck Global in New York. Investors will receive about $21 billion this month from maturing munis and will be looking to reinvest, according to Janney Montgomery Scott LLC in Philadelphia.

“It’s a huge amount of money coming due this month,” Colby said. “Certainly more than enough to accommodate a deal of this size.”

Keeping Up

Orascom also won $1.6 million in grants and loans and $57.5 million in tax credits, which may increase to $107.5 million by 2015.

The state increased its February offer of $31.5 million in credits after Illinois lawmakers suggested incentives to lure the plant, Hoffman said. The project is expected to create 165 permanent jobs and more than 2,000 construction-related jobs, Hoffman said.

A facility such as a fertilizer plant may result in only modest increases in jobs, said Greg LeRoy, executive director of Good Jobs First, which seeks to make economic development subsidies accountable and effective. “The ripple effects are very limited.”

Yet in Iowa, where the 5.1 percent jobless rate in October beat the 7.9 percent national average, officials said they had no choice but to fight for the venture.

“Every one of the 50 states is competing,” Hoffman said. “Leveling that tax playing field is something we’re participating in, so that we’re not losing out.”

Following is a pending sale:

CALIFORNIA POLLUTION CONTROL FINANCING AUTHORITY plans to sell about $781 million in revenue bonds as soon as this week, according to data compiled by Bloomberg. Part of the proceeds will be used to construct a desalination plant and a pipeline in San Diego County. (Added Dec. 10)

To contact the reporter on this story: Romy Varghese in Philadelphia at rvarghese8@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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