Moody's Downgrades CF Industries (CF) Ratings to Junk
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Moody's Investors Service, ("Moody's") downgraded CF Industries Holdings, Inc. (NYSE: CF) senior unsecured ratings to Ba3 from Baa3, withdrew its issuer rating of Baa3, and assigned a Ba2 corporate family rating (CFR), a probability of default rating of Ba2-PD and a speculative grade liquidity rating of SGL-1. The rating action reflects the company's weakening operating performance due to the fertilizer industry downturn, that is expected to persist into 2018, combined with CF's shift to a more aggressive financial policy that will subordinate the unsecured notes with secured debt. Moody's expects CF's credit metrics to weaken further in 2017 and remain under pressure into 2018 as a result of lower fertilizer prices amid increased market volatility as new nitrogen capacity is added. The outlook is stable. This action concludes the review commenced on October 14, 2016.
..Issuer: CF Industries Holdings, Inc.
.... Issuer Rating, Withdrawn
. Corporate Family Rating (CFR) Assigned at Ba2
. Probability of Default Rating (PD) Assigned at Ba2-PD
. Speculative Grade Liquidity (SGL) Rating Assigned SGL-1
..Issuer: CF Industries, Inc.
....Gtd Senior Unsecured Regular Bond/Debenture, Downgraded to Ba3(LGD4) from Baa3
....Senior Secured Regular Bond/Debenture, Assigned Baa3(LGD2)
..Issuer: CF Industries Holdings, Inc.
....Outlook, Stable ..Issuer: CF Industries, Inc. ....Outlook, Stable RATINGS RATIONALE
CF's Ba2 CFR rating reflects its aggressive financial policy that includes the proposed securing of its revolving credit facility, the potential for additional secured debt issuance to refinance its $1.2 billion of private placement notes and make-whole payment, as well as the lack of commitment to the investment grade profile during the fertilizer industry downturn. The rating also includes Moody's expectations that CF's credit metrics will be stressed through 2017 and into 2018 due to a weak nitrogen fertilizer pricing environment, that has compressed margins, and is anticipated to remain pressured for a protracted period as new capacity is added and absorbed into the marketplace. Over the third quarter and into the fourth quarter 2016, nitrogen fertilizer pricing has come under increased pressure due to anemic volumes as a result of delays in customer purchasing during this already seasonally weak period. Reportedly low inventory levels in the retail and distribution channel are likely to exacerbate market volatility in the fourth quarter of 2016 and through the planting season over the first half of 2017 while new capacity continues to come on line and pressures pricing. (US Gulf NOLA urea prices have fallen to $206/ton in October 2016 compared to $250/ton in 2015, and are at over 10-year lows. Likewise, US Gulf NOLA Ammonia has declined to $210/ton in October 2016 from $350/ton in October 2015.) Also reflected in its rating is CF's reliance on one product line, nitrogen fertilizer, and high dependence on a single site, Donaldsonville, Louisiana, for 40% of its North American nitrogen nutrient production capacity, once expansions are completed.
While Moody's estimates CF's Net Debt/EBITDA at 3.5x (4.6x Gross Debt/EBITDA), for the LTM ending September 30, 2016, weaker nitrogen fertilizer pricing and prospects for lower volumes will rapidly stress leverage. Moody's projects that CF's TTM Net Leverage could exceed 4.5x by year-end, even when adjusting for the pro forma impact of its new capacity, as low pricing compresses its margins and cash is used to support the completion of its capital expansion projects. As well, CF's $1.6 billion September 30, 2016 cash balance could fall below $1.0 billion by year-end since approximately $500 million in capex as well as some additional working capital will be used to complete and start-up its capacity expansions in Donaldsonville, Louisiana and Port Neal, Iowa. In 2017, Moody's anticipates that TTM Net Leverage will peak in the first half of the year as CF's lower cash balance combines with a weaker pricing environment resulting in TTM Net Leverage that could exceed 5.5x. (All financial metrics reflect Moody's standard adjustments.)
Supporting the rating is CF's size and operating capabilities as well as its cost advantaged position in the global nitrogen fertilizer marketplace and location advantage in North America, which imports over 20% of its nitrogen fertilizer needs. Importantly, CF is adding ammonia capacity which leverages the advantage of low natural gas prices (natural gas represents approximately 60-70% of the cash cost of producing ammonia, the building block of all nitrogen fertilizers) and supports margins. However, the global nitrogen industry will add 10% to capacity by 2018 to an already oversupplied marketplace. In North America new nitrogen fertilizer capacity will be added by the end of 2017 from: CF's Port Neal site, OCI NV (unrated), Koch Nitrogen (unrated), Agrium Inc. (Baa2 RUR), and a partnership with Yara International ASA (Baa2 stable)/BASF (A1 stable). Because the price of nitrogen fertilizers is set by the marginal cost producer, China high-cost coal based urea production, the timing of needed capacity shut-downs is uncertain. Therefore, it could take several years to achieve a more balanced market and bolster pricing since low demand growth of around 2% per annum will be slow to absorb the new capacity, over which time a transition period of greater price volatility is expected.
The stable outlook reflects Moody's expectations that CF will retain and utilize its ample cash to support its net leverage metric, capex spending needs and maturity payments and anticipates improved credit metrics in 2018.
An upgrade is remote at this time given Moody's expectations for a protracted period of low nitrogen fertilizer prices that will compress earnings and keep credit metrics pressured over the next two years. However, Moody's would consider a rating upgrade if aggregate debt were sustainably lowered to a level that could support average gross leverage of under 3.5x and Retained Cash Flow/Debt of over 20% through the cycle. Downward pressure to the rating could occur in the trough of the cycle if Net Leverage is sustained above 5.5x and Retained Cash Flow/Net Debt falls below 10%, or if shareholder remuneration is a use of cash.
CF's $4.6 billion in unsecured notes with maturities ranging from 2018-2044 are rated Ba3, one notch below the Ba2 CFR, as a result of their effective subordination to the proposed $750 million secured revolving facility as well as the potential for additional secured debt in the capital structure.
CF's SGL-1 Speculative Grade Liquidity Rating reflects its very good liquidity position. CF's primary liquidity is provided by its substantial cash balance of $1.6 billion as of September 30, 2016. Retained cash flow is expected to exceed $700 million in 2016, but free cash flow will be negative due to the elevated capital expenditures to complete expansion projects by year end. In 2017, cash flows will be supported by an estimated $800 million tax refund related to the carryback of certain U.S. tax losses as well as operating cash flows.
CF's secondary liquidity is provided by its proposed $750 million senior secured revolving credit facility, for which an amendment is being proposed to the current $1.5 billion senior unsecured revolving credit facility that will reduce the size of the facility, secure the facility, as well as change and add covenants. As of September 30, 2016 there were no borrowings on CF's credit facility, which is due September 18, 2020. Given the company's meaningful cash balance, we do not expect any borrowings under the revolver over the next 12-18 months.
In conjunction with the revolver amendment, CF has indicated that it will repay its $1.0 billion in senior notes due 2022, 2025 and 2027 including the related make-whole amount, which is estimated to be approximately $210 million as of October 31, 2016 based on market interest rates. Funding for the repayment of the notes is expected to be sourced from the issuance of new long-term secured debt, borrowings under the company's revolving credit facility, cash on hand or a combination of any of the foregoing.
In 2016, CF expects to have $2.3 billion in total cash expenditures, including $1.8 billion to complete planned expansion projects at Donaldsonville, LA and Port Neal, IA, and $450-$475 million for general sustaining capital expenditures. (Approximately $500 million of spending remains for the last quarter of 2016.) The company also paid a $150 million breakup fee, in the second quarter 2016, to OCI NV following the cancellation of its combination agreement.
Other uses of cash in 2016 will be for the payment of its regular annual dividend of $1.20/share, for a total of $282 million in 2016. CF also makes distributions to public unit holders in the Terra Nitrogen MLP as well as to CHS. The estimated amount of CHS Inc.'s semi-annual distribution earned for the third quarter 2016 is $22 million. As a result of the loss of its investment grade standing, CF will be required to make an annual payment of $5 million to CHS due to a contractual provision. Additional impacts from its credit evaluation below investment grade are expected to include possible collateral postings or letters of credit. CF has indicated that it will not complete its share repurchase authorization, $100 million remaining, during this downturn in nitrogen fertilizer prices.
CF has no near-term maturities; its next maturity of $800 million is due in May 2018 followed by another $800 million due in May 2020.
The principal methodology used in these ratings was "Global Chemical Industry Rating Methodology" published in December 2013. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
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