CHICAGO — The Iowa Fertilizer Co. expects to offer $1.2 billion of tax-exempt Midwestern Disaster Area Bonds next week in a long-term deal that will take out short-term financing to fund construction of a nitrogen fertilizer plant in southeast Iowa.
Several market participants said the deal faces a headwind from the negative headlines that followed the explosion of a Texas fertilizer plant last week, killing 14 and injuring more than 100. Market participants said the finance team was conducting a roadshow and investor meetings and late Thursday posted a supplement to the offering statement seeking to calm any investor concerns.
The supplement notes preliminary reports that attribute the Texas explosion to sodium ammonium nitrate, although the investigation is ongoing. The supplement reports that the Iowa plant won’t produce or sell solid AN. One of its products is expected to be liquid urea ammonium nitrate which the company describes as similar in properties but safer to handle and non-explosive.
The Iowa Finance Authority, which managed the state’s allocation of MDABs, is serving as the issuer for the deal set for Tuesday. Citi and Bank of America Merrill Lynch are underwriters and Dorsey & Whitney LLP is bond counsel. The bonds will refund debt issued by the company in December with an April maturity. It was previously extended to May and the proceeds have been held in escrow.
The company – owned by Cairo, Egypt-based Orascom Construction Industries -- turned to the short-term tender structure in order to get into the market ahead of the MDAB program’s Dec. 31 expiration as it needed more time to finalize contracts for the $1.8 billion project.
The deal marks one of the largest under the disaster program and one of the larger private-activity 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 also tapped the program for slightly more than $1.2 billion in a short-term financing with a tender in July.
The Iowa Fertilizer Co. will use bond proceeds to finance construction of the plant in Lee County and other infrastructure improvements, capitalized interest, a deposit to the debt service reserve fund, and financing fees. The bonds are tentatively structured with terms due in 2019, 2022, and 2025, according to the offering statement. The company is making an equity contribution of $581 million to the project.
The offering statement notes the investment risks, with repayment coming primarily from the sale of products to be produced at the plant, transportation and construction risks, and the company’s limited assets in the event of a default or bankruptcy. Ahead of the sale, Fitch Ratings said it expects to assign a BB-minus and stable outlook to the bonds. Fitch described as key rating drivers the company’s nitrogen market price exposure, natural gas risk, a strong project completion profile, and manageable operating risks. The bonds are secured by a first priority security interest in all tangible and intangible assets of the project and a pledge by Iowa Holding LLC.
The company will sell its nitrogen products to farmers, distributors, and blenders at market prices which have been volatile. The project will procure its natural gas feedstock through an existing pipeline and has entered into natural gas call swaptions for the first seven years. The project benefits from a fixed-price contract with an experienced operator and the plant’s use of commercially proven technologies with low maintenance risk. The project will have up to 2.2 million short tons of flexible capacity to produce ammonia, urea, urea-ammonium nitrate, and diesel exhaust fluid.
Iowa Gov. Terry Branstad has defended $100 million in state tax credits for the project in response to critics who raised questions over contract fraud charges leveled against the parent company by the federal government. He touted the estimated 165 permanent jobs and several thousand construction jobs the project would create and estimated $740 million in annual savings expected for farmers because of reduced import costs. “This is an investment that’s going to be here for 50 years or more,” Branstad said. Lee County has also agreed to forgo $133 million in property taxes.
