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Rating Action:

Moody's revises CF Industries outlook to positive, affirms Ba1 CFR

01 Oct 2021

New York, October 01, 2021 -- Moody's Investors Service ("Moody's") affirmed the Ba1 corporate family rating and the Ba1-PD probability of default rating of CF Industries Holdings, Inc. and changed the ratings outlook to positive from stable on completed and anticipated further debt reduction after the company's management set a $3 billion balance sheet debt target, which will support credit metrics in trough nitrogen pricing conditions. Moody's also upgraded the senior unsecured rating of CF Industries, Inc. to Ba1 from Ba2 and downgraded the rating on the 2026 senior secured notes, which now rank with the company's senior unsecured, to Ba1 from Baa2 because the notes no longer benefit from a collateral package as a result of a security fall away provision in the indenture. The speculative grade liquidity rating is unchanged at SGL-1

"The positive ratings outlook reflects expected improvement in credit metrics due to debt reduction and still strong nitrogen market fundaments," said Anastasija Johnson, VP-Senior Credit Officer at Moody's Investors Service. "While credit metrics will be supportive of the investment-grade credit rating, uncertainty about the company's growth strategy constrains the credit profile at this time."

Affirmations:

..Issuer: CF Industries Holdings, Inc.

.... Corporate Family Rating, Affirmed Ba1

.... Probability of Default Rating, Affirmed Ba1-PD

Downgrades:

..Issuer: CF Industries, Inc.

....Gtd Senior Unsecured Regular Bond/Debenture, (Changed from Senior Secured) Downgraded to Ba1 (LGD4) from Baa2 (LGD2)

Upgrades:

..Issuer: CF Industries, Inc.

....Gtd Senior Unsecured Regular Bond/Debenture, Upgraded to Ba1 (LGD4) from Ba2 (LGD4)

Outlook Actions:

..Issuer: CF Industries Holdings, Inc.

....Outlook, Changed To Positive From Stable

..Issuer: CF Industries, Inc.

....Outlook, Changed To Positive From Stable

RATINGS RATIONALE

The revision of the rating outlook reflects debt reduction and metrics improvement. CF paid off $500 million of debt this year, bringing balance sheet debt to $3.5 billion, and management also committed to paying off the remaining $500 million of 2023 notes on or before their maturity. Pro forma for the latest debt reduction, adjusted debt/EBITDA was approximately 2.3x in the twelve months ended June 30, 2020. Leverage is expected to decline below 2x in 2021 amid strong demand and pricing in the nitrogen fertilizer market. Production curtailments due to weather disruptions, delayed turnaround activity and high natural gas prices have resulted in supply shortages pushing nitrogen fertilizer prices to multi-year highs. We expect strong pricing levels to hold through the winter and spring application season but to decline in the second half of 2022 as more normal pace of production resumes. Even with lower prices in 2022, we do not expect the return to the recent pricing trough levels last seen in 2020 due to stronger commodity crop prices and continuing economic growth that support demand. As a result, we expect leverage to remain below 2.0x in 2022.

With the targeted debt reduction CF management is positioning the company to better weather the next cyclical downturn. At the current level, Moody's expects adjusted debt/EBITDA including standard adjustments for pensions and leases to be just below 4x at the trough of the cycle. Once the company reaches its debt reduction target, leverage should not exceed 3.5x at the trough of the cycle, better positioning the company for the upgrade to investment grade. Due to ongoing dividend payments and distributions to a minority holder, retained cash flow generation relative to debt will remain weak for the investment grade company at the trough of the cycle (below 15%), but we expect the company to remain free cash flow positive and have strong liquidity.

Peak nitrogen pricing conditions are supporting earnings growth in the near term, however, longer-term growth is constrained by current capacity. The announced green and blue ammonia projects will not start contributing earnings until 2023 and even then the contribution will not be meaningful. For example, the announced Donaldsonville green ammonia project is less than 1% of CF's ammonia production capacity and the larger blue ammonia project would not start until 2024. These and other investments into blue and green ammonia are currently estimated to cost in total approximately $400 million and can be funded from cash and operating cash flow without pressuring the company's credit metrics. Moody's views these projects as credit positive, but we do not expect them to significantly improve the company's current earnings profile. Current strong nitrogen fertilizer pricing levels and free cash flow generation allow the company to build a significant amount of cash on the balance sheet to support potential future growth opportunities. However, without a clear growth strategy management will likely also feel pressure from shareholders to distribute that cash. The company's management publicly stated it intends to return to investment grade, pay down debt to $3 billion between now and 2023, pursue clean energy growth projects and return cash to shareholders through regular dividend and share repurchases, rather than special dividends. The company's existing share repurchase authorization runs through the end of 2021 and we expect the board to renew it. The credit rating is constrained by a short history of operating with a less levered balance sheet and with low leverage metrics. Management will need to demonstrate its willingness to maintain significant cash cushion on the balance sheet to allow the company financial flexibility to fund future growth projects without significant increases in debt in order to support the investment grade rating.

CF's Ba1 corporate family rating also reflects the company's position as a leading global producer of nitrogen fertilizers with world scale production facilities at the lower end of the global cost curve and consistently high operating rates. CF has idled one of its UK facilities due to high energy prices. The UK facilities account for just under 10% of the company's production capacity and will not have a significant impact on the company's overall performance, even if one of them remains idle for an extended period of time. CF's concentration in a single commodity fertilizer nutrient, reliance on the weather dependent and seasonal agricultural market and resultant earnings volatility remain constraining factors for the credit.

Moody's SGL-1 speculative grade liquidity rating reflect our expectations that the company will have excellent liquidity over the next 12 months. We expect the company's total liquidity sources to exceed projected uses by more than 2.5x. Liquidity sources include about $520 million of balance sheet cash pro forma for the $250 million debt paydown and full availability under the company's $750 million revolver due in December 2024. The company is expected to generate close to $2 billion of EBITDA over the next four quarters. The company is projected to have over $1 billion of uses over the next four quarters, including interest, common dividend and minority distributions and capex. Projected capex increased to $500 million to fund elevated turnaround activity, but is projected to decline to $475 million in 2022. The revolver has the minimum interest coverage covenant of 2.75x and the maximum total leverage covenant of 3.75x, which can step up to 4.25x for four quarters in case of an acquisition. We expect the company to remain in compliance with its covenants.

As an owner and operator of nitrogen facilities, we view CF Industries as having high environmental credit risks, including carbon transition risks, and high social credit risks because its operations could have a negative impact on local communities. Over time, the company could face increasingly stringent regulations aimed at reducing greenhouse gas emissions which could increase its costs. Moody's believes the company has established expertise in complying with these risks, and has incorporated procedures to address them in its operational planning and business models. The company is pursuing green and blue ammonia projects which are viewed as more environmentally friendly. Fertilizer applications by farmers also cause greenhouse gas emissions, while fertilizer runoff from farms can also cause nutrient pollution and contribute to algal growth, raising social risks such as public and regulatory concerns. CF, as a manufacturer, isn't responsible for over application of fertilizer and has taken initiatives to educate potential buyers on responsible usage.

Governance risk is low, as CF is a public company with clear and transparent reporting. Management has set a new balance sheet debt target and desire to maintain investment grade rating, but does not have a leverage target and has to balance the need to fund growth with shareholder returns.

Positive outlook reflects expected improvement in credit metrics due to proposed debt reduction and elevated commodity nitrogen prices and strong demand.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Moody's could consider an upgrade if the company completes and maintains its announced debt reduction target, articulates a clear growth strategy or announces projects or offtake agreements that would significantly improve the earnings profile without weakening credit metrics. Moody's could also consider an upgrade if management commits to maintaining investment grade rating and builds financial flexibility to fund its growth strategy. For an upgrade to be considered, adjusted financial leverage needs to be sustained below 3 times and not to exceed 4 times during trough pricing conditions. Retained cash flow to debt needs to be sustained above 25% and the company needs to be free cash flow positive at trough pricing conditions.

Moody's could downgrade the rating if adjusted financial leverage is sustained above 4 times, retained cash flow to debt is sustained below 15%; the company experiences substantive deterioration of liquidity. The rating could also be downgraded if the company changes its financial policy or capital allocation prioritizing shareholder returns.

The principal methodology used in these ratings was Chemical Industry published in March 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1152388. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

CF Industries, Inc., headquartered in Deerfield, Illinois, is a leading global producer of nitrogen-based fertilizers. CF's production facilities include five nitrogen fertilizer manufacturing complexes in the US, two in Canada, two in the U.K. and a joint venture in Trinidad and Tobago. The company has annual capacity to produce between 19 - 20 million product tons of various nitrogen products. The company generated annual revenues of $4.6 billion for the LTM ending June 30, 2021.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Anastasija Johnson
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Glenn B. Eckert
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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