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Rating Action:

Moody's upgrades CF Industries to Ba1, outlook stable

18 Nov 2019

New York, November 18, 2019 -- Moody's Investors Service ("Moody's") upgraded the corporate family rating of CF Industries Holdings, Inc. to Ba1 from Ba2 and the probability of default rating to Ba1-PD from Ba2-PD. Moody's also upgraded instrument ratings (see detailed rating list below). The outlook is stable. The speculative-grade liquidity rating remains SGL-1.

"The upgrade reflects a significant reduction in debt since the downgrade in 2016 and strong operating performance and cash generation despite an unprecedented poor planting season in North America," said Anastasija Johnson, VP-Senior Analyst at Moody's.

Upgrades:

..Issuer: CF Industries Holdings, Inc.

.... Probability of Default Rating, Upgraded to Ba1-PD from Ba2-PD

.... Corporate Family Rating, Upgraded to Ba1 from Ba2

..Issuer: CF Industries, Inc.

....Senior Secured Regular Bond/Debenture, Upgraded to Baa2 (LGD2) from Baa3 (LGD2)

....Senior Unsecured Regular Bond/Debenture, Upgraded to Ba2 (LGD4) from Ba3 (LGD4)

Outlook Actions:

..Issuer: CF Industries Holdings, Inc.

....Outlook, Remains Stable

..Issuer: CF Industries, Inc.

....Outlook, Remains Stable

RATINGS RATIONALE

The Ba1 corporate family rating reflects CF's strong position as the leading global producer of nitrogen fertilizers with world scale production facilities at the lower end of the global cost curve, a significant reduction in debt that brings pro forma leverage as adjusted by Moody's to 2.7 times in the twelve months ended September 30, 2019 and adjusted EBITDA to interest coverage of over 7 times, strong cash flow generation with pro forma retained cash flow to debt close to 30% and strong liquidity. The rating is constrained by the company's concentration in single commodity fertilizer nutrient, reliance on the weather-dependent and seasonal agricultural market and a resultant earnings volatility. The rating is also constrained by a short period of operating history with a less levered balance sheet, a lack of clear growth strategy and current financial policy that implies a Moody's adjusted leverage over 4 times during the trough.

The rating reflects Moody's expectations of improved fertilizer demand in 2020 due to higher corn planted acres, which will reduce inventories in the channel and support some price recovery in nitrogen fertilizers. Moody's also expects global capacity additions outside of China to be roughly in line with demand, while future domestic expansions are minimal. We also expect US producers, including CF Industries, to retain their cost advantage on the global cost curve due to projected low natural gas prices. In this environment, Moody's expects CF to generate flat to slightly higher earnings in 2020 and maintain credit metrics near current pro forma levels. However, some risks to this outlook include continued increase in Chinese urea exports (driven by lower coal and currency costs), continued commodity crop price weakness and softening economic environment, which would keep nitrogen prices below mid-cycle levels.

The announced early retirement of $500 million of notes due in 2020 and $250 million of notes due in 2021, will further reduce the company's interest expense, supporting already strong cash flow generation. After this early debt redemption, Moody's expects CF Industries to use all free cash flow for share repurchases (roughly $750 million left under the current $1 billion authorization until the end of 2021) or acquisitions. Moody's does not anticipate further debt paydown beyond the remaining $250 million of 2021 notes at maturity and any further credit metric improvement would need to be driven by earnings growth, which Moody's expects to remain volatile.

This level of debt still implies Moody's adjusted leverage of over 4 times assuming trough EBITDA of about $1 billion and effectively no free cash flow. The company states it's committed to investment-grade metrics over the long term, without providing specific leverage targets. On the third quarter earnings call management added that it wants to return to investment grade, but financial policies have been aggressive historically. Given CF's strong operating performance, debottlenecking projects would only add limited incremental capacity and future growth would need to come from either capacity expansions or acquisitions, which could lead to higher debt levels. The credit rating is constrained by a short history of operations with a less levered balance sheet and a lack of clear growth strategy.

CF Industries' strong liquidity (SGL-1) is supported by cash on hand, availability under its revolver and strong free cash flow generation. Pro forma for the expected debt pay-down, CF Industries had over $200 million of cash on hand as of September 30, 2019. CF's secondary liquidity is provided by its $750 million senior secured revolving credit facility due in 2020. Moody's expects CF to renew its facility at the same size as the current revolver. As of September 30, 2019 there were no borrowings on CF's credit facility and full availability. The revolver has three maintenance covenants: maximum total secured debt leverage of 3.75x, minimum interest coverage of 1.5x and maximum total debt to total capitalization ratio of 0.6x. We expect the company to remain in compliance with its covenants.

As a manufacturer of nitrogen fertilizers, CF Industries has exposure to environmental risks, which could result in significant compliance expenses, clean-up costs, penalties or other liabilities relating to handling, manufacture, use, emission, discharge or disposal of hazardous or toxic material at facilities or the use of its chemical products. Moody's believes the company has established expertise in complying with these risks, and has incorporated procedures to address them in their operational planning and business models. Governance risk is low, as CF is a public company with clear and transparent reporting. However, there is short operating history with lower leverage, which management would need to balance with the need for growth or capacity expansion over time.

The stable outlook reflects expectations of a more typical planting season in 2020 with higher corn planted acres supporting CF volume and recent improvement in metrics.

Factors that could lead to an upgrade:

Adjusted financial leverage sustained below 3 times and not to exceed 4 times during trough

Retained cash flow to debt sustained above 25%

Clear articulation of importance of achieving and sustaining investment grade rating

Clear articulation of the growth strategy

Factors that could lead to a downgrade:

Adjusted financial leverage above 4 times

Retained cash flow to debt below 15%

Substantive deterioration of liquidity

CF Industries Holdings, Inc., (CFH) headquartered in Deerfield, Illinois, is a leading global producer of nitrogen-based fertilizers and the parent company of CF Industries, Inc. (CF). CF is the largest global producer of ammonia and manufactures other nitrogen fertilizers such as granular urea, urea ammonium nitrate solution (UAN) and ammonium nitrate (AN). The company also manufactures other nitrogen products, such as diesel exhaust fluid (DEF), for industrial customers. The company generated annual revenues of $4.7 billion for the LTM ending September 30, 2019.

The principal methodology used in these ratings was Chemical Industry published in March 2019. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

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.

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

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
Vice President - Senior Analyst
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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