Iowa Fertilizer Co. launches investment grade ratings in bond redemption

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The Iowa Fertilizer Co. will present newly minted investment grade ratings to the market this week when it repays all of the $854 million of its Midwest Disaster Area revenue bonds issued to fund construction of a plant. manufacture of nitrogen fertilizers.

The tax exemptions will be sold Thursday through the Iowa Financial Authority with Citigroup Global Markets in charge of the books and BofA Securities and JPMorgan as co-lead directors. Dorsey & Whitney LLP is the bond adviser on the bonds.

The new bonds will be backed by a guarantee from IFCo’s Amsterdam-based parent company OCI NV, itself sporting new upgrades to investment grade.

The Iowa Fertilizer Co. nitrogen fertilizer production facility in Lee County, Iowa.

The Weitz company.

“The outstanding bonds are secured by a project finance structure consisting of a mortgage, a pledge of income and a pile of reserves. All of this is eliminated as part of this transaction and it is replaced by an OCI parent guarantee”, it is therefore rated on par with OCI’s other senior debt, Citi Chief Executive David Livingstone said in a recorded presentation to investors.

S&P Global Ratings last week upgraded OCI’s senior unsecured ratings from BB-plus to BBB-minus as the company’s balance sheet reaps the benefits of “high selling prices in strong market conditions” for its ammonia, its nitrogen fertilizers and its industrial products which in turn helped the company’s efforts to repay the debt.

While cyclical volatility limits the outlook for the rating, the Russian-Ukrainian conflict should actually benefit OCI, a global producer of methanol and nitrogen products, as it has “further tightened market fundamentals, product availability and trade with Russia becoming increasingly difficult,” S&P mentioned.

Fitch Ratings said it plans to assign the bonds a BBB-minus rating, matching its OCI rating upgrade following Thursday’s OCI upgrade to BBB-minus, representing a one-notch upgrade in the company’s rating from BB-plus while Moody’s Investors Service upgraded IFCo’s rating from Ba1 to Baa3. The bonds are currently redeemable based on the netting call provisions of the initial tranches.

The investment-grade ratings should broaden Iowa Fertilizer’s buyer base as it heads into a market rocked by capital outflows amid rising interest rates, inflationary pressures and the Russian-Russian conflict. Ukrainian. The market has seen price declines of 150 basis points since early January, just 36 since the start of the month.

“Every day seems to be in discovery mode, even on vanilla deals,” one market participant said. “Everything they thought last week may not be the case this week, but everything has its price and with the right concessions,” the deal will find buyers.

Waiting until Thursday to set the 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 the market a decade ago with short-term financing before the expiration of the federal government’s Midwest Disaster Area Public Activities Bond program. The proceeds funded the construction of its $1.8 billion nitrogen fertilizer production facility in Lee County, southeast Iowa.

The company, which was previously 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 catastrophe program and one of the largest speculative-grade private activity bond issuances, market participants said. The $14.6 billion federal program enabled private activity borrowing for qualified projects in designated counties hard hit by the spring 2008 storms.

Arkansas, Indiana, Illinois, Iowa, Missouri, Nebraska and Wisconsin counties were eligible. The IFA has exhausted its entire $2.6 billion authorization. A fertilizer project in Indiana also leveraged the program for just over $1.2 billion in funding.

BEC informed investors at the end of last year, it was considering refinancing some or all of its IFCo bonds through traditional repayment with tax-exempt debt; solicitation and exchange of negotiated consent; or refinancing in other markets.

The company sells its nitrogen products to farmers, distributors and blenders at market prices which have been volatile. Officials billed the project as one of the largest private sector construction projects in Iowa history and the first global 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 grants because it creates thousands of jobs. Critics countered that the money could have been better invested elsewhere.

The project marked two milestones in 2017. After construction and financing difficulties, the company launched production and also reported that the Internal Revenue Service had closed its interim financing review of nearly $1.2 billion. dollars and its permanent funding of nearly $1.2 billion without changing their tax exemption. status.

Non-AMT bonds are structured with a nominal maturity of 2050 and are offered with a series of mandatory tenders on the long end of the yield curve with dates to be set based on investor feedback.

OCI has moved from financing its assets on a non-recourse, project financing basis to financing at the parent company level.

“The transaction should primarily simplify the capital structure of the group, number one; second, to allow OCI to continue to participate in the US tax-exempt municipal bond market; and, thirdly, significantly extending the maturity profile of the group,” said Ahmed El-Hoshy, Managing Director of OCI NV, in the recorded presentation.

With sales of $6.3 billion, the company has grown over the past decade from a single plant to a global platform with nine production sites on four continents. The publicly traded company is a global producer and marketer of nitrogen-based fertilizers and base chemicals, primarily methanol. Members of the Egyptian Sawiris family collectively hold a majority stake, which amounts to approximately 56% of the shares.

Nitrogen products represent 80% of the revenues of six installations and methanol 20% of three installations. The use of nitrogen products goes beyond fertilizers to include consumer products, ammonia for industrial use and the reduction of emissions from diesel engines, while methanol is used in the final production of industrial and consumer products and to power cars, giving it strong growth prospects.

In the investor presentation, the company promotes safety efforts at its plants given the widely publicized dangers of nitrogen production, its diversification, its capital structure and the positive outlook for its markets after a downturn during of the previous decade.

On environmental, social and governance issues, the company cites its 2050 goal of achieving carbon neutrality and expects it to play an important role in the transition to a clean hydrogen energy economy. The company also said it aims to install more women in leadership positions with the aim of reaching a target of 25% by 2025.

“Strong fertilizer demand, tight supply and rising commodity prices have pushed up nitrogen fertilizer prices. While the industry is bound to remain cyclical, we expect these strong conditions to persist through 2023,” S&P said. “We believe that OCI’s debt reduction and its financial policy commitment to investment grade ratings will support its credit quality through the cycle.”

Fitch upgraded the OCI to BBB-minus on Thursday and said it plans to assign that rating to Iowa Fertilizer bonds pending receipt of final documents.

“The upgrade follows OCI’s application of strong cash flow generation and proceeds from the sale of minority interests to gross debt reduction,” Fitch said. “The rating also reflects OCI’s strong global position in the nitrogen fertilizer and methanol markets, a modern industrial footprint with cost competitiveness, robust profitability and strong liquidity.

Moody’s raised OCI’s rating from Ba1 to Baa3 in recognition of balance sheet measures that last benefited from debt reduction to $2.8 billion, according to its calculations, from $4.3 billion a year earlier. year earlier.

“The planned reduction in gross debt positions the company well to maintain credit metrics and financial flexibility in line with a higher rating through the volatile cycle in the nitrogen fertilizer and methanol markets,” Moody’s said.

The investment risk section of the offering statement spans 20 pages and covers the cyclical price volatility of its products, market competition and the company’s business dependence on price. volatile natural gas, which is the primary feedstock and fuel used to produce its nitrogen and methanol products and accounts for a significant portion of production costs.

Company strategies that build on future global decarbonization efforts and a transition to a clean hydrogen energy economy could be delayed or become more costly and weather and climate conditions could impact on production and costs and acts of terrorism could have an impact on production facilities.

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