The Iowa Fertilizer Co. will take newly minted investment grade ratings to the market this week when it refunds all $854 million of its Midwestern Disaster Area revenue bonds issued to finance construction of a nitrogen fertilizer manufacturing plant.
The tax-exempts will sell Thursday through the Iowa Finance Authority with Citigroup Global Markets running the books and BofA Securities and JPMorgan as co-senior managers. Dorsey & Whitney LLP is bond counsel on the bonds.
The new bonds will be secured by a guarantee from IFCo’s Amsterdam-based parent OCI N.V., itself sporting new upgrades to investment grade.
“The outstanding bonds are secured by a project finance structure including a mortgage, pledge of revenues and a bunch of reserves. All of that is being eliminated as part of this transaction and it’s being replaced by an OCI parent guarantee,” so it’s rated on par with OCI’s other senior debt, David Livingstone, a managing director at Citi, said in a recorded investor presentation.
S&P Global Ratings last week raised OCI’s senior, unsecured ratings to BBB-minus from BB-plus because the company’s balance sheet is reaping the benefits of “high selling prices amid strong market conditions” for its ammonia, nitrogen fertilizer and industrial products that have in turn aided the company’s efforts to pay down debt.
While cyclical volatility constrains the rating’s prospects, the Russia-Ukraine conflict actually stands to benefit OCI, a global producer of methanol and nitrogen products, because it has “tightened market fundamentals further, with product availability and trade with Russia becoming increasingly difficult,” S&P said.
Fitch Ratings said it expects to assign a BBB-minus rating to the bonds, matching its upgrade of OCI's rating following it Thursday upgrade of OCI to BBB-minus from which represents a one notch hike in the company’s rating of BB-plus while Moody’s Investors Service has raised IFCo's rating to Baa3 from Ba1. The bonds are currently callable based on the make-whole call provisions of the original tranches.
The investment grade ratings should extend Iowa Fertilizer's buyer base as it heads into a market roiled by outflows amid rising interest rates, inflationary pressures, and the Russian-Ukraine conflict.
“Every day seems to be in discovery mode, even on plain vanilla deals,” said one market participant. “Whatever they might have been thinking last week might not be the case this week but everything has its price and with the right concessions” the deal will find buyers.
Waiting till Thursday to price gives the syndicate plenty of time during the week to poll buyers and price the deal accordingly, the market source added.
IFCo first entered in the market a decade ago with a
The company, which previously was based in Egypt, converted to a long term structure with a $1.2 billion sale in 2013.
The deal marked one of the largest under the disaster program and one of the larger speculative-grade, private activity bond issues, market participants said. The $14.6 billion federal program allowed for private-activity borrowing for qualified projects in designated counties hit hard by storms in the spring of 2008.
Counties in Arkansas, Indiana, Illinois, Iowa, Missouri, Nebraska and Wisconsin were eligible. The IFA exhausted all of its $2.6 billion authorization. An Indiana fertilizer project
OCI
The company sells its nitrogen products to farmers, distributors, and blenders at market prices which have been volatile. Officials touted the project as one of the largest private sector construction projects in Iowa’s history and the first world-scale, greenfield nitrogen fertilizer facility built in the country in more than 25 years that was worth the $100 million in state tax breaks and $30 million in local subsidies because it creates thousands of jobs. Critics countered the money could have been better invested elsewhere.
The project marked
The non-AMT bonds are structured with a 2050 nominal maturity offered with a series of mandatory tenders on the long end of the yield curve with the dates to be set based on investor feedback.
OCI has transitioned from financing its assets on a project finance, non-recourse basis to parent level financing.
“The transaction is primarily expected to simplify the group’s capital structure, number one; two, allow OCI to continue to participate in the U.S tax-exempt municipal bond market; and, three, significantly extend the group’s maturity profile,” Ahmed El-Hoshy, chief executive officer of OCI N.V., said in the recorded presentation.
With $6.3 billion in revenues, the company has grown over the last decade from a single plant to a global platform with nine production sites on four continents. The publicly listed company is a global producer and distributor of nitrogen-based fertilizers and commodity chemicals, primarily methanol. Members of Egypt's Sawiris family collectively hold a controlling stake, which amounts to about 56% of shares.
Nitrogen products account for 80% of revenues from six facilities and methanol for 20% at three facilities. Use of nitrogen products extends beyond fertilizer to include consumer products, ammonia for industrial use, and reducing emissions from diesel engines, while methanol is used in end production for industrial and consumer products and use to fuel cars giving it strong growth prospects.
In the investor presentation, the company promotes safety efforts at its plants given the well-publicized dangers of nitrogen production, its diversification, capital structure, and positive outlook for its markets after a downturn in the previous decade.
On environmental, social and governance issues, the company cites its 2050 target to reach carbon neutrality and expectation that it will play a strong role in the transition to a clean hydrogen energy economy. The company also said it’s aiming to install more women in leadership positions with a goal of meeting a 25% target by 2025.
“Strong fertilizer demand, tight supply, and rising feedstock prices have pushed up prices for nitrogen fertilizers. While the industry is bound to remain cyclical, we anticipate these strong conditions will persist into 2023,” S&P said. “We believe that OCI's debt reduction and financial policy commitment to investment-grade ratings will support its credit quality across the cycle.”
Fitch on Thursday upgraded OCI to BBB-minus and said it expects to assign that rating to the Iowa Fertilizer bonds pending the receipt of final documents.
“The upgrade follows OCI's application of strong cash flow generation and proceeds from minority stakes sale to reduction of gross debt,” Fitch said. “The rating also captures OCI's strong global position in the nitrogen fertilizer and methanol markets, modern industrial footprint with cost competitiveness, robust profitability and strong liquidity.”
Moody’s raised the OCI rating to Baa3 from Ba1 in recognition of the balance sheet metrics that have benefitted from a debt reduction last to $2.8 billion, based on its calculations, from $4.3 billion a year earlier.
“The anticipated gross debt reduction positions the company well to sustain credit metrics and financial flexibility in line with a higher rating through the volatile cycle of the nitrogen fertilizer and methanol markets,” Moody’s said.
The offering statement's investment risk section spans 20 pages and covers the cyclical volatility of its products’ prices, market competition, and the company’s business dependence on the volatile price of natural gas which is the principal raw material and fuel used to produce its nitrogen products and methanol and makes up a significant portion of production costs.
The company’s strategies that rely on future global decarbonization efforts and a shift to clean hydrogen energy economy could be delayed or become more costly and weather and climate change conditions could impact production and costs and acts of terrorism could impact production facilities.
