Fitch Ratings – New York – 10 Oct 2023: Fitch Ratings has affirmed the Issuer Default Ratings (IDR) of CF Industries Holdings, Inc. and CF Industries, Inc. (CF Industries) at ‘BBB’. Fitch has also affirmed the unsecured revolving credit facility and senior unsecured notes at ‘BBB’. The Rating Outlook is Stable.
The ratings and outlook primarily reflect forecasted strength of the nitrogen fertilizer market, strong financial flexibility, disciplined capital allocation, and its low cost position. Fitch expects EBITDA leverage to be sustainably below 2.5x and expects management to fund growth projects from cash flow.
KEY RATING DRIVERS
Strong Nitrogen Fertilizer Pricing: CF Industries’ profitability is expected to remain robust over the medium-term, exhibited by EBITDA margins of around 40%, owing to the company’s advantaged feedstock position and a positive agriculture outlook stemming from low stock-to-use ratios and tight global supply. Nitrogen fertilizer pricing is expected to reain fairly strong and to continue supporting CF Industries’ FCF. Fitch recently raised its nitrogen fertilizer price assumptions due to improving demand, continued short-term supply disruptions as a quarter of EU capacity remains offline, and uncertainties over export quotas in China’s ports.
Fitch’s nitrogen fertilizer price assumptions (published Sept. 14, 2023) and natural gas price assumptions (published Sept. 13, 2023) are as follows:
–Ammonia – FOB Middle East $/tonne: 380 in 2023; 300 in 2024 and thereafter;
–Urea – FOB Middle East $/tonne: 330 in 2023; 270 in 2024 and thereafter;
–Natural Gas Henry Hub $/mcf: 2.8 in 2023; 3.25 in 2024; 3.0 in 2025; 2.75 in 2026 and thereafter;
–Natural Gas TTF/NBP ($/mcf): 13.00 in 2023; 10.00 in 2024; 10.00 in 2025; 5.0 in 2026 and thereafter.
Strong Financial Flexibility: CF Industries benefits from strong financial flexibility due to its healthy leverage and strong free cash flow profile. The company has a manageable debt load of aound $3 billion after successfully reaching its deleveraging target in 2022, along with full availability under its $750 million revolver. Free cash flow is supported by robust expected EBITDA generation, manageable capex requirements and prudent working capital management.
With no exposure to variable interest rates given that all of total debt is fixed rate, an elevated cash position, and full availability under its revolver, CF Industries has strong flexibility to pursue their various strategic priorities.
Disciplined Capital Allocation: Fitch expects CF Industries’ capital allocation priorities to remain balanced between organic/inorganic growth initiatives and shareholder returns. The Waggaman plant purchase represented an efficient use of excess cash because of its seamless fit with CF Industries’ existing operating network and strategy. As the company has strong leverage and maturity profiles, management is expected to pursue share repurchases opportunistically. If CF Industris and Mitsui decide to go forward with the “blue” ammonia facility, Fitch estimates that CF Industries’ share of the construction costs would be around $1.3 billion over three years-four years, beginning in 2025, which they would be able to primarily fund from cash generation and cash on the balance sheet.
Size, Scale, Low Cost: CF Industries Holdings, Inc. benefits from its position as the largest nitrogen fertilizer producer in North America and the world’s largest ammonia producer, as well as its position as one of the lower-cost producers globally, given the U.S shale gas advantage. The company operates five nitrogen fertilizer production facilities in the U.S., two in Canada, and one in the United Kingdom.
In 2022, CF Industries accounted for roughly 37% of the North American ammonia capacity and 42% of North American granular urea capacity. Per CRU global cost curves, the bulk of the company’s ammonia production is in the first quartile, the bulk of urea production is in the fist or low second quartile, the bulk of UAN production is in the first quartile, and the bulk of AN production is in the first quartile.
Clean Energy Initiatives: Fitch expects CF Industries to focus on organic growth and increase its capital spending as it pursues its “blue” and “green” ammonia projects. Blue and green ammonia are seen as key parts of the transition to clean energy. Blue ammonia is produced by leveraging carbon capture and sequestration processes to significantly reduce carbon emissions compared to conventional “grey” ammonia.
Green ammonia production is carbon-free and 100% renewable. The development of a market for blue and green ammonia could potentially be credit positive for CF Industries, to the extent it results in meaningfully improved earnings and increased end-market diversification. The blue ammonia projects will allow the company to benefit from the 45Q tax credit for carbon sequestration. Economically feasible green ammonia capacity at scale could reducethe company’s reliance on natural gas as a feedstock.
DERIVATION SUMMARY
CF Industries has a strong operating profile relative to fertilizer peers ICL Group Ltd. (BBB-/Stable), OCP S.A. (BB+/Stable) and The Mosaic Company (BBB/Stable). CF Industries’ EBITDA margins, accounting for Fitch adjustments, troughed at 28% in 2017 and are expected to be in the mid to high 40% range compared with peers ranging from the mid to high 20% range for ICL and The Mosaic Company, when markets stabilize.
CF Industries’ financial profile is stronger than ‘BBB-‘ fertilizer peers. CF Industries’ EBITDA leverage was 0.5x for 2022 compared with 0.7x at ICL and 0.8x at Mosaic. CF Industries is smaller than and less diversified than LyondellBasell Industries N.V. (BBB/Positive) but maintains higher margins and maintains lower leverage.
CF Industries, Inc.’s IDR is linked to parent company CF Industries Holdings, Inc.’s IDR.
KEY ASSUMPTIONS
Fitch’s Key Assumptions Within Our Rating Case for the Issuer
–enry Hub gas price of $2.8/mcf in 2023, $3.25/mcf in 2024, $3.00/mcf in 2025, and $2.75/mcf in 2026;
–Average Selling Prices of $306/ton in 2023, $251/ton in 2024, $251/ton in 2025, and $247/ton in 2026 derived from the Fitch fertilizer price deck published on Sept. 14, 2023;
–Capital expenditures forecasted at $550 million in 2023 and at similar levels thereafter;
–Fitch forecasts share buybacks at $1 billion for 2023, later years are lower due to emphasis on opportunistic repurchases.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
–An upgrade above ‘BBB’ is not anticipated but may occur if CF Industries maintains EBITDA leverage of below 1.5x on a sustained, midcycle basis;
–Continued focus on low fixed charges to maintain long-term flexibility through the cycle.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
–Inability to maintain EBITDA leverage sustainably beow 2.5x;
–Gross debt materially above $3.0 billion in the absence of investment that enhances FCF;
–Available liquidity expected to be less than $1 billion on average.
LIQUIDITY AND DEBT STRUCTURE
Strong Liquidity: As of June 30, 2023, CF Industries had $3.2 billion in cash on hand and its $750 million unsecured revolver due Dec. 5, 2024 was fully available.
CF Industries has low exposure to the perceived elevated interest rate environment over the medium-term, given that all of current total debt is fixed rate.
ISSUER PROFILE
CF Industries is the largest nitrogen fertilizer producer in North America and the world’s largest ammonia producer. Operations are among the lowest cost producers, globally, given access to cost-advantaged natural gas.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG CONSIDERATIONS
The highest level of ESG credit relevanceis a score of ‘3’, unless otherwise disclosed in this section. A score of ‘3’ means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch’s ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch’s ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.