TEXT-Fitch upgrades CF Industries to 'BBB'
Oct 3 - Fitch Ratings has upgraded the Issuer Default Ratings (IDR) of CF Industries Holdings, Inc.
(CF Holdings) and CF Industries Inc. (CF) to 'BBB' from 'BBB-'. Coincident, the two unsecured notes issues and the senior unsecured revolver of CF have been upgraded to 'BBB' from 'BBB-'. The Rating Outlook is Stable.
The ratings' upgrades are based on a continuing bullish business environment which has led CF to outperform Fitch's expectations. Farm economics are strong with the demand for grains being pulled by population growth and corn-for-ethanol to meet higher renewable fuel requirements. A slump in corn production caused by this past season's drought and high temperatures have combined with speculation to push corn prices up to $7.50/bushel from $5/bushel last June. In concert the demand for and price of nitrogen fertilizers has risen, ammonia (Tampa prices) rising from $625/metric tonne in June to $715/metric tonne currently. CF's aggregate nitrogen tonnage sold in the first half of 2012 was 1.8% ahead of last year with ammonia plants running at 97% of capacity through the second quarter. Nitrogen based fertilizers accounted for 85% of CF's net sales in the first half of this year and 87% of sales by volume; phosphate fertilizers make up the balance.
Complementing the demand for CF's nitrogen-based products has been a declining North American cost curve due to increased shale gas production. Natural gas prices have fallen year over year, with CF paying $3.31/MMBtu (including hedges) in the past six months versus $4.32/MMBtu a year ago. Lower manufacturing costs and higher nitrogen fertilizer prices have pushed gross margins to almost 60% from 50% a year ago.
Also working in CF's favor is the 60% or so of nitrogen-based fertilizers imported into this country by necessity. Exporters to this country (some of whom pay double the natural gas prices paid in the U.S.) have an interest in keeping nitrogen fertilizer prices high which assures the sale of CF's lower cost products.
The combination of these circumstances has yielded record sales, profits and EBITDA in the first half of the year. Year over year sales for the first six months were almost 10% ahead of 2011. Operating earnings were 21.5% ahead of 2011 and 18% ahead of Fitch's expectations. EBITDA was 19% ahead of last year at $1.9 billion and 16% ahead of Fitch's expectations. Free cash flow which includes an increase of $38.0 million in dividends was $838.6 million versus $802.3 million in the first six months of 2011. Leverage declined to 0.46 times (x) LTM EBITDA from 0.51x at the end of fiscal 2011.
CF has begun to spend part of its strong cash flow. In the second quarter CF completed its $1.5 billion share repurchase program which its Board approved in August 2011 with the purchase of 3.1 million shares for $500.0 million. The program has been refreshed, up to $3.0 billion through December 2016. This past August CF announced that it would acquire the 34% of the shares of Canadian Fertilizers Limited (CFL) that it did not own from Viterra, Inc. for C$915 million, subject to Glencore International plc's acquisition of Viterra. CFL owns the Medicine Hat fertilizer complex in Alberta which CF has operated for 35 years. Finally, CF is looking at expanding its gross ammonia production by approximately 1.0 million tons and UAN and/or urea production by approximately 3.5 million tons through brownfield expansions which could tally upwards of $2.0 billion in capital expenditures over time.
It is unlikely that CF will spend beyond current cash flow generation and we expect CF to continue to maintain conservative liquidity guidelines. Cash on hand of $1.4 billion plus unused revolver capacity totaled almost $1.9 billion at the end of the second quarter. CF is conservatively managed, and the company's capital expenditure guidance for the current year is $400 million. FCF for the current year will likely exceed Fitch's previous expectations of $1.8 billion.
In May CF replaced its $500 million senior secured revolving credit facility with an unsecured credit facility of the same size maturing in May 2017. Financial tests include a minimum quarterly interest coverage ratio of 2.75:1.00 and a maximum debt/EBITDA of 3.75:1.00. CF was well within compliance at the end of the second quarter. The company has outstanding two unsecured bond issues of $800 million each maturing in 2018 and 2020 and LTM EBITDA of $3.5 billion, calculated by Fitch as of the end of the second quarter.
WHAT COULD TRIGGER A RATING ACTION
Positive: Future developments that may, individually or collectively, lead to a positive rating action include: --Free cash flow (after dividends) grows more positive as agricultural economics continue on their positive trend, and --CF maintains a liquidity profile in the vicinity of the $1.9 billion available at the end of the second quarter. Negative: Future developments that may, individually or collectively, lead to a negative rating action include: --FCF turns negative which in combination with stock repurchases and acquisitions significantly erodes liquidity. --The demand for nitrogen based fertilizers suffers a very sharp and sustained reduction. --Natural gas prices revert to 2010 levels in concert with a reduction in fertilizer prices.
Additional information is available at '
'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research: --'Corporate Rating Methodology' (Aug. 12, 2011). Applicable Criteria and Related Research: Corporate Rating Methodology (New York Ratings Team)