CF Industries rating outlook revised negative: Fitch

CF Industries rating outlook revised to negative: Fitch

9:55 AM, 27th October 2017
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NEW YORK, US: A report from Fitch Ratings Inc states that it has affirmed the issuer default ratings (IDR) of CF Industries Holdings Inc (CF) and CF Industries Inc. (CF Industries) at 'BB+'.

Fitch revised the rating outlook to negative from stable to reflect drop-in earnings expectations and a risk of higher leverage through the ratings horizon. Fitch believes that weakness in the nitrogen fertilizer market is likely to persist into 2018 with a gradual recovery thereafter.

Key rating drivers

Largest nitrogen producer: CF Industries Holdings Inc benefits from its position as the largest nitrogen fertilizer producer in North America and 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 US, two in Canada and two in UK. CF accounted for roughly 43 percent of North American ammonia capacity in 2016.

Expected ammonia weakness: Fitch believes ammonia prices will remain relatively low through 2018 on global oversupply before improving on better demand and supply rationalization. Recovery in domestic nitrogen fertilizer prices depends on capacity closures, which would accelerate from strengthening global energy prices. In particular, stronger Asia Pacific coal markets could accelerate closures and further improve CF's cost position.

Recovering FCF: Spending on expansion projects at CF's Port Neal and Donaldsonville facilities is substantially complete, and annual capital spending in 2017 and thereafter should drop to below $450 million. Fitch expects FCF after dividends to be positive on average and at least $200 million in each of 2019 and 2020.

Solid profitability: Despite expectations for lower ammonia prices, Fitch expects CF to generate average operating EBITDA margins in excess of 25 percent, and annual operating EBITDA of at least $1 billion in 2018 improving thereafter.

CHS venture enhances liquidity: CHS Inc purchased a minority interest in CF Industries Nitrogen, LLC for $2.8 billion in February 2016. CHS will be entitled to semi-annual profit distributions from CF Nitrogen based generally on the volume of granular urea and urea ammonium nitrate 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.

Elevated leverage: Fitch believes FFO-adjusted net debt best reflects CF's leverage because it captures distributions to CHS and cash-build in advance of debt maturities. Fitch expects FFO-adjusted net leverage to trend toward 3.3x longer-term.

Key assumptions

  • Fitch's key assumptions within the rating case for the issuer include:
  • Henry Hub gas price that trends up from $3.00/mcf in 2017 to a long-term price of $3.25.
  • Average prices roughly $214/ton in 2018, $234/ton in 2019, and $238/ton in 2020.
  • Capital spending below $450 million on average after 2017.
  • No share-buybacks and no growth in dividends.

The rating outlook has been revised to negative from stable.

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