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05 Aug 2009
Rating outlook remains negative
New York, August 05, 2009 -- Moody's Investors Service has downgraded the rating on Fertinitro Finance
Inc.'s $250 million of senior secured bonds to Caa2 from
B3. The outlook remains negative. The downgrade reflects
the $33 million draw the project made on its debt service reserve
account in April, which left the project with a total of less than
$30 million in cash, and its failure to replenish a meaningful
amount of that draw in June as the company projected it would as recently
as the middle of that month. The draw on the debt service reserve
was much larger than the $7.5 million draw that was anticipated
when the project's outlook was revised to negative in March.
The company currently anticipates fully utilizing its remaining debt service
reserves in conjunction with its next debt service payment in October,
which it currently projects will leave it with less than $9 million
in its operating account. The negative outlook considers the possibility
of a payment default in October if the company falls short of its forecasts
again. In addition, a new Venezuelan petrochemical law both
reduces the likelihood of sponsor support in the event of a cash flow
shortfall and lowers expected recovery values in the event of a default
in Moody's opinion. However, we note that the forecast
appears to be based on relatively conservative pricing assumptions and
given the pricing volatility of its outputs the project could potentially
outperform current expectations, as it has done in the past.
The deterioration in the project's financial performance is a result
of a sharp drop in prices for ammonia and urea. The average realized
price per metric ton of ammonia in the first half of this year was less
than $200, down from $506 in 2008. Over the
same period, average urea prices fell to $240 from $416
in 2008. While both ammonia and urea prices spiked in 2008,
prices for both during the first half of 2009 were below 2007 levels ($290
and $279 respectively) as well. In the company's most
recent monthly forecast, prices were projected to remain at depressed
levels for the rest of the year, though they were expected to pick
up somewhat in the September-October timeframe. The issuer
currently reports that pricing is trending upward, but this has
not been substantiated. Moody's estimates that if urea and
ammonia prices average just $18/ton, or 9.1%
on a weighted average basis, less than currently forecast,
the project could burn through the rest of its forecast operating account
balance by the end of October, which would leave it with insufficient
funds to make its scheduled debt service payment.
Furthermore, we note that the company's current forecast anticipates
a significant improvement in operating performance, which we believe
will be challenging for it to achieve given its recent history.
Failure to achieve this projected improved performance could also put
pressure on the project's ability to make its next debt service
payment. The projected capacity factor of 92% for July to
December would result in a capacity factor of 88% for the year.
The project was able to exceed this level in 2006. However,
in the past two years its capacity factor fell two 82% and 76%
respectively, though a portion of this decline was attributable
to extrinsic events (primarily power outages). We note that current
projections anticipate the deferral of $5 million of the $25
million in capital expenditures that had initially been budgeted for this
year. While this will enable the company to conserve some cash,
these investments were intended to help resolve some of the operating
problems the company has encountered in the past and thus increases the
likelihood that these problems could recur.
On June 16, the Venezuelan Congress enacted a new Organic Law for
Petrochemical Activities that requires that all newly formed enterprises
involved in petrochemicals be at least 50% owned by the government.
The issuer is of the opinion that is not affected because it was formed
prior to passage of the law, which it asserts does not apply retroactively,
nor does it believe that the law forces the transfer of shares or contemplates
the nationalization of pre-existing joint-ventures.
However, the law is quite broadly written and remains subject to
interpretation, implementation, and enforcement. Given
the government's history of nationalization of enterprises in other
sectors of the economy, and its past actions relating to the mandated
diversion of Fertinitro's output to the domestic market at below-market
prices, the law increases the level of political risk and uncertainty
faced by the project. In Moody's opinion, this reduces
the likelihood that the project's non-governmental sponsors,
which together own 65% of the project, will provide financial
support in the event of a shortfall in cash flows and also reduces the
expected recovery value in event of default.
The last rating action with respect to Fertinitro was on March 24,
2009 when the outlook was revised to negative.
Fertinitro's rating was assigned by evaluating factors we believe are
relevant to the credit profile of the issuer, such as i) the business
risk and competitive position of the company versus others within its
industry, ii) the capital structure and financial risk of the company,
iii) the projected performance of the company over the near to intermediate
term, and iv) management's track record and tolerance for risk.
These attributes were compared against other issuers both within and outside
of Fertinitro's core industry and Fertinitro's rating is believed to be
comparable to those of other issuers of similar credit risk.
Fertinitro Finance Inc. is a financing vehicle incorporated in
the Cayman Islands, whose debt is secured by Fertilizantes Nitrogenados
de Venezuela, Fertinitro, C.E.C. ("Fertinitro"),
a $1.1 billion integrated fertilizer project located in
Venezuela. The project, which was completed in 2001,
consists of two ammonia and two granular urea plants at the Jose Petrochemical
Complex in Jose, Venezuela. The project monetizes surplus
associated gas from oil production in Venezuela, to be supplied
by PDVSA Gas. Production capacity is approximately 1.4 million
metric tons of urea and 1.3 million tons of ammonia annually,
though approximately 67% of the plant's ammonia output is used
to produce urea. Ammonia and urea are primarily used as agricultural
Vice President - Senior Analyst
Infrastructure Finance Group
Moody's Investors Service
Moody's downgrades Fertinitro to Caa2
Chee Mee Hu
Infrastructure Finance Group
Moody's Investors Service
No Related Data.
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