July 2, 2012 / 8:31 PM / 5 years ago

TEXT-S&P raises CF Industries Inc rating

Overview
     -- We are raising our corporate credit rating on U.S. fertilizer producer 
CF Industries Inc. to 'BBB-' from 'BB+'.
     -- CF Industries Inc. has strengthened its leverage-related metrics, and 
we expect its operating performance will support appropriate credit measures 
at the current rating despite some potential for cyclicality.
     -- We are also raising our rating on the company's unsecured debt to 
'BBB-' from 'BB+'.
     -- The stable outlook reflects our expectation that financial policy will 
support the ratings, and earnings and cash flow generation will remain at 
levels consistent with the ratings.



Rating Action
On July 2, 2012, Standard & Poor's Ratings Services raised its corporate 
credit rating on Deerfield, Ill.-based CF Industries Inc. (CF) to 'BBB-' from 
'BB+'. At the same time, we raised our ratings on the company's unsecured debt 
to 'BBB-' from 'BB+'. The outlook is stable.


Rationale
The upgrade reflects strength in recent operating performance, prospects for 
ongoing improvements despite the cyclical nature of the sector, and our 
expectation that leverage and cash flow-related credit metrics will support a 
financial profile consistent with the current ratings. We expect that the 
company will continue to benefit from the availability of competitively priced 
natural gas arising out of shale gas production that has improved the cost 
position of U.S.-based nitrogen fertilizer producers relative to imports, and 
that favorable supply and demand for domestic nitrogen-based fertilizer 
producers will continue to benefit operating performance. The company's EBITDA 
increased to a record of more than $3 billion as of March 31, 2012, on a 
12-month basis from about $1.9 billion for a similar period a year ago. The 
full benefits of 12 months of EBITDA from the acquisition of the former Terra 
Industries and a run up in product prices, combined with low cost natural gas 
prices, have contributed to the improvement as of March 31, 2012. Although our 
view is that record-high product prices are not sustainable in the long run, 
we expect the demand for the company's products will remain healthy and 
support sustainable operating profits. 

Still, we expect operating performance in CF's commodity business will remain 
susceptible to weather-related risks and business cycles, but the strength of 
the company's credit metrics provides some cushion against these risks. The 
key ratio of funds from operations to total debt (net of cash balances funded 
by seasonal customer advances) was more than 100% as of March 31, 2012--well 
above our expectation of 40% to 45% for the rating and above our expectation 
of 30% at trough levels. The strong credit measures also provide a cushion for 
unexpected potential debt-funded growth or shareholder reward initiatives, 
beyond those already announced. We believe the company can undertake the 
remaining portion of its announced share-buyback plan and its capital spending 
plan, totaling approximately $2 billion, over the next several years, and meet 
our expectations for the rating. A key assumption in our analysis is our view 
that management will approach growth and investments in a manner that reflects 
its commitment to credit quality.

Our base case scenario reflects our expectation that 2012 and 2013 operating 
performance will remain strong relative to historical levels, despite 
weakening from 2011. Key elements in our base case include:

     -- A decline in product pricing, which we expect to remain favorable but 
lower than record levels in recent quarters.
     -- A modest decline from the very high EBITDA margins of more than 50% in 
2011, though we expect margins in 2012 to remain high.
     -- The absence of significant unfavorable weather-related events that 
could drive down volumes more than five percentage points compared with 2011. 
     -- Continued favorable natural gas pricing, though we expect prices will 
rise above the low levels in the fourth quarter of 2011.

The ratings on CF reflect what Standard & Poor's considers to be its 
"intermediate" financial risk profile--including our expectation for moderate 
financial policies--and a "fair" business risk profile that incorporates the 
company's leadership in a narrowly focused commodity fertilizer market, where 
we generally expect demand to exceed domestic supply. 

CF's 2010 acquisition of Terra Industries Inc. made CF into North America's 
largest nitrogen fertilizer company, and we expect CF will maintain this 
strengthened competitive position. The combination expanded its regional 
production in key locations in the U.S. and Canada, though a significant 
amount of production is still concentrated in a few large production 
facilities. 

We believe CF will continue to benefit from its distribution and storage 
infrastructure in the freight-intensive commodity product sector. We expect 
the company to continue to benefit from favorable market conditions, including 
a favorable North American supply and demand balance, which has arisen as a 
result of U.S. nitrogen capacity closures over the past 15 years, the absence 
of large new domestic capacity to meet recent demand increases, and improved 
demand for reasons including significant corn (a large consumer of nitrogen) 
consumption to support ethanol production. We do not anticipate that recently 
announced capacity increases in the sector will alter the favorable supply and 
demand in the near to medium term. The situation in the long term is less 
clear, and beyond 2017 new capacity increases could begin to tilt the balance 
unfavorably. 

Entry barriers, including environmental issues, have contributed to the 
absence of new supply additions in the domestic nitrogen sector. We believe 
that the fundamental improvements in the domestic nitrogen fertilizer industry 
will support EBITDA for the next few years.

The most notable credit weaknesses are the inherent cyclicality of results and 
the susceptibility of operating performance to weather-related events. Despite 
improvements to the supply and demand, favorable long-term demand trends, and 
the growth in alternate uses for nitrogen, demand for nitrogen remains linked 
to the level of corn and other crop production, which in turn largely depends 
on the agricultural economy and weather. For CF, nitrogen business will 
largely determine operating performance--this business generates approximately 
80% of its revenue. The remaining revenue comes from a phosphate 
business--also primarily used for fertilizer products--where the company does 
not enjoy the market share advantages that it does in the nitrogen business.

Customer concentration is also a risk. A few top customers account for a major 
portion of aggregate company revenues. That the top customers are agricultural 
cooperatives, consisting of several hundreds of farmers, only partly mitigates 
this risk. In addition, the concentration in a single geographic market, North 
America, and the concentration of a large portion of production in key 
locations are risks.

The financial risk profile is intermediate. We adjust debt to include customer 
advances, the present value of operating leases, tax-adjusted asset retirement 
obligations, environmental liabilities, and pensions and employee benefit 
underfunding. However, we net from debt, cash balances that we assume customer 
advances fund. We do not net CF's other large cash balances (beyond the 
amounts we assume customer advances fund) against debt because of the 
potential for these balances to erode because of industry cyclicality or 
management actions. We expect CF to be prudent in its use of debt for any 
further growth or acquisition opportunities and expect it will maintain 
financial policies that support credit quality. We partly base our belief on 
management's public comments on its intention to maintain debt leverage that 
supports credit quality amid the inherent cyclicality of the business.


Liquidity
We expect liquidity to be "strong." We expect sources of funds to be at least 
1.5x uses. We also expect that sources of funds would still exceed uses even 
if EBITDA declines by 30%. We base our conclusions on liquidity on the 
following observations and assumptions:
     -- The company's revolving credit facility in recent years has generally 
had very high levels of availability. As of March 31, 2012, there were no 
borrowings against the company's $500 million revolving credit facility. In 
May 2012 the company entered into a new $500 million unsecured credit facility 
maturing 2017.
     -- We expect CF to generate meaningful levels of free cash flow over the 
next 12 to 18 months.
     -- The debt maturity profile is favorable with the next meaningful debt 
maturity consisting of the $500 million revolving credit facility in 2017.

Outlook
The stable outlook reflects our expectation that CF will continue to benefit 
from a favorable operating environment over the next several quarters. Our 
base case assumes that EBITDA will remain above $2 billion and that liquidity 
will remain adequate. We view the 2010 meaningful debt reduction at CF as 
contributing to credit quality and expect that management will continue to 
adopt policies relating to the deployment of surplus cash in a manner that 
supports credit quality.

We could lower the ratings if operating performance weakened unexpectedly or 
debt rose so that the ratio of funds from operations to total debt declined 
below 30% with no prospect for immediate improvement. This could happen if 
revenue declines sharply by more than 20% and EBITDA margins decline to below 
30%. Although this is unlikely and does not form part of our base case, we 
believe that the sector remains susceptible to unexpected event risks, 
including weather-related risks. If management, against our expectation, 
stretched the financial profile to pursue growth objectives or shareholder 
rewards it could exacerbate an operating setback. 

We believe the company's business risk profile constrains the ratings, and we 
do not expect to raise the ratings over the next 12 to 24 months.


Related Criteria And Research
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, 
May 27, 2009
     -- Corporate Ratings Criteria 2008, April 15, 2008


Ratings List
Upgraded; Outlook Action
                                        To                 From
CF Industries Inc.
 Corporate Credit Rating                BBB-/Stable/--     BB+/Positive/--

Upgraded
                                        To                 From
CF Industries Inc.
 Senior Unsecured                       BBB-               BB+
  Recovery Rating                       NR                 3

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