Sale of bond-financed fertilizer plant raises debt and competition questions

The owner of a municipal-bond financed nitrogen fertilizer plant in Lee County, Iowa, is trying to sell the plant to one of its largest competitors, Koch Industries.

The Iowa Fertilizer Company plant was built from 2012 to 2017 near the unincorporated community of Wever. Helping to kick off construction were $1.194 billion of tax-exempt private activity bonds and a roughly $550 million public subsidy.

The original speculative-grade debt that financed the plant was refinanced in 2022 in an $838.7 million deal with low investment-grade ratings.

OCI Global

The IFCo bonds, issued by the Iowa Finance Authority, are backed by a guarantee from IFCo's parent company, Netherlands-based OCI N.V. In 2022, OCI switched from financing its assets on a project finance, non-recourse basis to parent level financing, in part to continue to access the U.S. tax-exempt municipal bond market, Chief Executive Officer Ahmed El-Hoshy said at the time.

S&P Global Ratings in April 2022 assigned the revenue refunding bonds a rating of BBB-minus and raised OCI's long-term issuer rating to investment-grade BBB-minus from speculative-grade BB-plus. The outlook is stable.

The rating agency noted strong demand for fertilizer, tight supply and climbing feedstock prices, to which it attributed the higher prices for nitrogen fertilizers. Due to those market conditions, S&P predicted that OCI's adjusted funds from operations to debt ratio would climb to 130-140% compared to 52% the year prior. 

Fitch Ratings likewise assigned the bonds a senior unsecured rating of BBB-minus with a stable outlook. In its rating report, Fitch cited the "the unconditional and irrevocable guarantee for the payment of any interest and principal provided by OCI." The rating agency said it expected that OCI would keep funds from operations net leverage at or below 2.5x, regardless of the forecast of normalizing fertilizer prices by this year.

A spokesperson for the Iowa Finance Authority referred all questions to the companies involved. Koch Industries did not respond to a request for comment.

An OCI representative said the principal outstanding on the IFCo bonds is $838.745 million. Asked about the guarantee backing the bonds, the representative said OCI has no plans to transfer the bonds to another OCI subsidiary before the sale closes. The OCI guarantee will disappear at closing if Koch decides to keep or defease the bonds. Koch may also choose to repay the bonds. 

If Koch opts to keep the bonds, the bonds will stay with IFCo and may benefit from Koch's higher credit rating, the representative said. 

Koch is rated AA-minus with a stable outlook by S&P Global Ratings and Aa3 with a stable outlook by Moody's Ratings.

Nothing about the pending sale is disclosed on the Municipal Securities Rulemaking Board's EMMA bond disclosure website. 

OCI announced it was selling all its interests in IFCo to Koch Ag & Energy Solutions in December. According to OCI, that sale as well as the divestment of half its equity holding in Fertiglobe came about after a global strategic review. The company expects both moves together to generate $6.2 billion of net proceeds and enhanced value for shareholders. 

The sale to Koch, which OCI plans to close sometime this year, has drawn criticism, particularly from the Iowa agriculture sector.

In a Des Moines Register OpEd last month, Iowa Farmers Union President Aaron Lehman noted that four corporations, including Koch, now control over 75% of the nitrogen fertilizer supply.

Lehman said the administration of then-Gov. Terry Branstad — whose lieutenant governor, Kim Reynolds, took over for Branstad when he became ambassador to China in 2017 — had argued that public investment in the IFCo plant would "pay off for Iowa farmers for decades" by increasing competition among fertilizer producers.

Lehman did not respond to requests for comment. A spokesperson for Reynolds did not respond to requests for comment. 

Lehman's group, which opposed the public subsidy for the plant, has joined 18 other agricultural and policy groups in urging federal regulators to block the upcoming sale. 

Federal Trade Commission Chair Lina Khan visited Iowa last month to hear concerns from local farmers, telling the audience that America needs to keep its agricultural sector "fair, open and competitive," The Gazette reported.

An FTC spokesperson said the FTC does not comment on pending mergers or acquisitions.

Iowa State Auditor Rob Sand has also raised concerns about the sale, saying Iowa taxpayers will be "on the hook" for the public subsidy and the cost of fertilizer will go up. Sand, Iowa's only Democratic statewide officeholder, did not respond to requests for comment.

The plant now has about 260 full-time employees.

When the bonds and public subsidies were being debated, Branstad said jobs and lower costs for farmers by bringing fertilizer production onshore, reducing import costs, justified the state subsidies.

In 2013, former Gov. Branstad said at a public event, "At the start of this Iowa Fertilizer facility project, the unemployment rate in Lee County was 8%, highest in the state. That's why my administration fought so hard to encourage the company to locate its fertilizer plant here."

The state and local government incentives that lured OCI to Iowa included $96.5 million of Iowa Investment Tax Credits, which IFCo has not yet used; a 20-year property tax exemption from Lee County; Iowa sales tax refunds of $10.9 million; and the plant's bonds, issued through the Midwest Disaster Area Bond Program, which was passed after 2008 storms struck the Midwest.

To support recovery from the storms, the program allocated to seven affected states tax-exempt private-activity bond authority that did not count against their PAB volume cap, including $2.6 billion to Iowa.

The program extended tax-exempt benefits to projects and developments that might otherwise not qualify under tax code rules.

The Iowa plant is one of two major fertilizer projects awarded financing through the Midwest disaster area bond program.

While the Iowa plant opened in 2017, the Midwest Fertilizer Company's project in Posey County, Indiana, appears to be in limbo. According to the most recent EMMA filing for the $1.259 billion of bonds issued in 2013 through Posey County, the company purchased all the bonds in 2016 and continued to hold them in 2023 and intends to continue doing so while it continues to develop the project.

In the end, OCI invested roughly $2.5 billion in the Lee County plant, which cost over $3 billion to build. 

"This deal is yet another example of the consequences of short-sighted public policy focusing only on imagined benefits and ignoring the pitfalls," the Iowa Farmers Union said in a statement following the announcement of the sale.