MOODY'S ASSIGNS Ba1 TO MISSISSIPPI CHEMICAL'S SENIOR UNSECURED NOTES AND Ba1 TO SENIOR UNSECURED BANK FACILITY
New York, 11-07-97 -- Moody's Investors Service assigned a Ba1 rating to Mississippi Chemical Corporation's (MCC) proposed $200mm senior unsecured note offering, likely including 10-year and 20-year tranches. Moody's also assigned a Ba1 to MCC's existing senior unsecured $300mm bank revolver maturing 2001 and to any successor, comparably structured, revolver. Note proceeds will retire bank debt. MCC is the seventh largest ammonia producer, 6th largest nitrogen fertilizer producer, and 6th largest producer of phosphate, potash and nitrogen fertilizers headquartered in North America. Moody's also assigned a (P)Ba1 to subsequent senior note offerings under MCC's $300mm shelf. The outlook is stable.
The ratings are restrained by: MCC's configuration as a moderate size, comparatively undiversified, merchant producer of cyclical commodity nitrogen fertilizer products (large majority of EBITDA); regional concentration and exposure to Southeastern U.S. crop patterns; comparatively greater EBITDA volatility due to regional natural gas costs (representing over 61% of nitrogen fertilizer COGS) significantly higher and more volatile than gas costs incurred by the strong Canadian fertilizer companies and, to a lesser extent, U.S. mid-continent producers; the current elevated debt structure funding accelerated growth, intensified regional market penetration, and investments to begin moderating MCC's natural gas cost vulnerability; and a full FY 1998 capex budget that will defer debt reduction. The firm's business is strengthened by these investments but financial risk is increased at the beginning of a down cycle in EBITDA, expected to last several years. Moody's does not expect meaningful diversification of MCC's substantial concentration in nitrogen products.
The ratings are supported by: favorable long-term global demographic and economic trends supporting approximately 2.5% to 3% annual global growth and 1.5% annual North American growth in nitrogen fertilizer demand, possibly sufficient over a full cycle to absorb anticipated global and North American capacity additions; favorable U.S. fertilizer industry structure trends placing increasing proportions of capacity (and expansion decisions) in the hands of public, pure-play fertilizer companies, and increasingly integrating the ammonia/upgraded nitrogen fertilizer and ammonia/diammonium phosphate (DAP) value chains; MCC's strong, lucrative regional end-product niches in upgraded nitrogen fertilizers; a recently achieved self-sufficiency in ammonia, the cornerstone raw material for nitrogen fertilizers; a forthcoming improved natural gas cost basis and gas-to-ammonia conversion efficiency through MCC's Trinidad project; and expanded nitrogen and DAP fertilizer capacity to capitalize on its improved ammonia and natural gas fundamentals and global nitrogen and DAP demand trends. Upgraded nitrogen fertilizer products represent the large majority of MCC's EBITDA. Over time, such upgraded products tend to sell for 2 to 3 times the cost of ammonia, the principal intermediate raw material.
The ratings are further supported by: unquestioned access to natural gas volumes, a principal raw material and, by mid-1998, reduced exposure to volatile natural gas costs; regionally competitive nitrogen plants located in its core market, the fertile Southeastern U.S. farm belt, and the 1996 intensification of that position with the $309mm in-market acquisition of all of First Mississippi Corporation's (FM) fertilizer assets (FM was long ammonia capacity and MCC was short ammonia); strong market shares in ammonium nitrate (AN) and nitrogen solutions in its Mississippi, Louisiana, Arkansas, and Alabama core market; MCC's reported position as the lowest unit cost producer of AN in North America (AN is 23% of revenue; and management's stated commitment to return to its historically conservative capital structure following the current round of debt-supported expansion, regaining an average Total Debt/Book Capital posture in the range of 30% to 40%.
Additional restraints include: raw material cost and product demand/supply/pricing patterns established by regional and global economic/political forces beyond MCC's control; risks of foreign overbuilding and re-emergent Former Soviet Union competition; gas costs moving in cycles unrelated to nitrogen product prices; and the unpredictable large impact the stop-and-go purchasing and capacity expansion policies of China and India have on fertilizer prices.
A 1996 potash acquisition and current phosphate expansions will do little to diversify concentration in nitrogen products since MCC has also expanded nitrogen products. The FM acquisition made MCC self-sufficient in ammonia while the Trinidad ammonia project, and other nitrogen expansion initiatives, will to a degree improve MCC's natural gas-to-ammonia conversion efficiency and/or reduce exposure to extremely volatile gas costs.
The $330mm Trinidad JV, 65% funded with non-recourse debt, is important to reducing MCC's natural gas cost vulnerability. The JV will be 10% more efficient than MCC's current average natural gas-to-ammonia conversion efficiency and, based on current conditions, will source gas at levels substantially below MCC's current U.S. natural gas costs and improve MCC's overall natural gas conversion efficiency and cost base.
Accordingly, due to U.S. Gulf Coast cost pressures quite distinct from Western Canadian gas cost patterns, MCC's nitrogen fertilizer cash flow is more volatile than Canadian producers sourcing cheaper, less volatile gas. Product transportation differentials tend to protect MCC from direct Canadian competition, but the North American nitrogen fertilizer pricing structure limits MCC's latitude to consistently pass its relatively greater gas cost volatility on to customers. Also, fertilizer prices and natural gas costs move mostly in unrelated cycles, which can severely pinch MCC's nitrogen fertilizer EBITDA.
Moody's thus believes the Trinidad JV is a strategic investment and, on a going concern basis, its debt is effectively part of MCC's debt structure. The JV's ammonia pricing formula will mitigate MCC's gas cost exposure on 357,000 short tons per year of ammonia MCC is obligated to take annually, starting in 1998, under a minimum price contract. The importance of the JV, and its scale relative to MCC, requires consideration of MCC's $107mm share of JV debt in MCC's debt structure, though Moody's notes that under present market conditions, the minimum ammonia price is well below the prevailing market price of ammonia.
Natural gas, historically the most volatile commodity, represents 79% of the cost of producing ammonia and over 61% of total nitrogen fertilizer raw materials costs. Though MCC's plants are located in the heart of the U.S. natural gas pipeline transportation network, competition for gas supplies from the Central Midwest and Northeast bids regional gas prices to levels above competitors' gas costs in the mid-continent U.S. and consistently far above competitors' costs in Canada.
The rating is further supported by: a long-term phosphate supply agreement with the national phosphate company of Morocco and low maintenance capex approximating $25mm-$30mm per year.
Pro-forma, the capital structure would include approximately $64mm of revolver debt, $200mm of notes, and $441mm of net worth, plus MCC's take-and-pay contract, with a minimum ammonia floor price, to acquire one-half the ammonia output at the Trinidad ammonia project. The purchase contract supports debt service on one-half of the JV's $214mm of otherwise non-recourse project debt. Pro-forma internal and committed liquidity includes $136mm of undrawn availability under a likely reduced $200mm revolver, and EBITDA expected to range between $125mm and $90mm for several years, down from pro-forma 1997 run-rate EBITDA of $177mm (including recent and pending capex projects and acquisitions). MCC also holds $53mm of assets for sale that are subject to a purchase option expiring January 1998. FY98 capex may approximate $120mm, after $139mm in FY1997, reportedly declining significantly thereafter.
A nitrogen fertilizer down cycle has begun, accentuated by very high gas prices. The decline in nitrogen fertilizer prices, China's stop-and-go fertilizer purchasing patterns, and very high gas costs sharply impacted EBIT in the quarter-ended 9/30/97. Measured from a common base, the decline is more severe if measured relative to MCC's much smaller base of business last year. EBIT declined from $14.7mm in the quarter-ended 9/30/96 to $8.9mm in the quarter-ended 9/30/97. EBITDA in 1Q9/30/FY97 was approximately $18mm versus $19mm of 1Q9/30/FY96 due to much higher depreciation in 1997 principally from the FM acquisition.
Pro-forma FY6/30/97 EBITDA, assuming MCC had acquired FM and the New Mexico potash businesses on 7/1/96, would, according to MCC, have generated $153mm of FY6/30/97 EBITDA, versus $119mm actually generated in FYE6/30/97. Pro-forma, MCC reports it would have generated $175mm of FY96 EBITDA versus $103mm actually generated in FY96.
The sharp decline in pro-forma EBITDA from FY96 to FY97 is due largely to reduced gross margins caused by an 11% rise in natural gas costs, a 6% and 4% decline in DAP prices and volumes, respectively, due to decreased Chinese buying, offsetting 6% and 13% increases, respectively, in composite nitrogen fertilizer and potash prices, and increased potash and nitrogen fertilizer volumes.
Moody's anticipates FY98 results far below pro-forma FY1997 levels and may remain so for several years. Natural gas costs remain high and unseasonably high overall.
Excluding Trinidad JV debt, pro-forma Gross Debt/LTMEBITDA at FYE9/30/97 would have been approximately 1.8x but will likely exceed 3x to 3.25x during FYE98 due to declining EBITDA and increased debt in support of capex. Pro-forma FY97 EBITDA/Gross Interest would have been 8.2x but will approach, and may decline below 5x by FYE98. Gross Debt/Book Capitalization was 38% at 9/30/97. Management targets Gross Debt/Book Capital in the 40% range by 6/30/98. Equity market capitalization is approximately $510mm, yielding Gross Debt/Enterprise Value of approximately 35%. Leverage is significantly less conservative if MCC's effective obligation on the Trinidad JV is factored into the effective capital structure.
FY98 capex relates primarily to an expansion at MCC's Yazoo City facility, including the addition of a 650 ton-per-day nitric acid plant, a new ammonia plant, modifications to the ammonium nitrate plant, and expansion of its DAP facility at Pascagoula, Mississippi.
Mississippi Chemical Corporation is headquartered in Yazoo City, Mississippi. Founded in 1948, MCC went public in 1994, converting from an agricultural cooperative ownership structure. MCC produces ammonia (1,580,000 tons per year excluding the Trinidad JV), ammonium nitrate (750,000 tons per year), nitrogen solution (600,000 tons per year), and urea (560,000 tons per year) fertilizers from plants in Yazoo City and Donaldsonville, Louisiana. Expansion at Yazoo City will add 175,000 tons-per-year of ammonia and 200,000 tons-per-year of ammonium nitrate. The company also manufactures phosphate fertilizers from a 720,000 tons per year plant in Pascagoula, Mississippi (being expanded to 900,000 tons-per-year), and produces 970,000 tons per year of potash fertilizer from three mines in New Mexico leased from the federal government and from the state of New Mexico.
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