CF Industries Inc. Outlook Revised To Stable On Stronger Fertilizer Prices; 'BB+' Rating Affirmed

  • Pricing for CF Industries Inc.'s nitrogen-based fertilizer products including urea have firmed up in 2018, contributing to better operating performance. We anticipate this improvement will be sustainable at least over the next 12 months.
  • The improved operating performance has strengthened credit metrics, including the funds from operations-to-total debt ratio, which we expect will be at least 20% over the next 12 months. We revised our outlook to stable from negative and affirmed our issuer credit rating at 'BB+'.
  • We also affirmed our issue-level and recovery ratings on the company's secured notes and revolving credit facility at 'BBB-' and '1', respectively, and on the unsecured debt at 'BB+' and '4', respectively.
NEW YORK (S&P Global Ratings) Dec. 19, 2018--S&P Global Ratings today took the 
rating actions listed above. The outlook revision on CF Industries to stable 
from negative reflects our assumption that the recently stronger prices in the 
second half of 2018 for urea, ammonia, and other nitrogen-based products will 
be sustained at least over the next 12 months. We believe the resulting 
improvement in credit metrics, including the funds from operations 
(FFO)-to-total debt ratio to 20% and above, will hold. This key credit ratio 
has been weaker than our expectations at 20% for most of 2017 and early 2018. 

The stable outlook reflects our view that the recent improvement in CF 
Industries' operating performance and credit metrics is sustainable. We do not 
anticipate any supply shocks in the form of large capacity additions that will 
reverse the recent price improvement, nor do we anticipate demand weaknesses 
arising out of weather-related events or a general slowdown in the use of 
nitrogen-based fertilizer. Our outlook remains favorable in terms of the 
long-term demand growth trends. We do not believe future shareholder rewards, 
growth plans, or acquisitions will increase levels beyond our range of 
expectation. We believe that capital spending that peaked in 2015 and 2016 
will continue at the significantly lower levels achieved since then. In our 
base case we expect an FFO-to-total adjusted debt ratio of at least 20%.

We could lower the rating over the next 12 months if operating performance 
weakens unexpectedly or debt rises such that FFO to total debt falls below 20% 
on a weighted average basis with no prospect for improvement. We considered 
two historical years and two future years in our weighted average calculation, 
which offsets the risk of sustained weakness in this ratio from brief, sharp 
downturns in operating performance. However, if we anticipate that FFO to 
total debt will consistently be below 20% on a weighted-average basis, we 
would consider a downgrade. This could happen through several combinations of 
revenue and margin deterioration, including a sharp decline in revenues or a 
sustained decrease in EBITDA margins by a few percentage points each year 
relative to our expectations. 

We believe that the sector remains susceptible to unexpected event risks. If 
management, against our expectation, stretches the financial profile to pursue 
additional growth objectives or shareholder rewards, any operating setback 
could be exacerbated and potentially weaken metrics, which could result in a 
downgrade. We could also lower the rating if there are major operational risks 
from bringing on new expanded capacity at the company's existing plants.

Although unlikely, we could raise the rating over the next 12 months if we 
expect FFO to debt to improve to about 45% for a sustained period, with the 
expectation that in a future downturn the ratio would remain above 30%. We 
believe that FFO to debt could exceed 30% for brief periods; however, we would 
also consider the volatility in earnings in the nitrogen fertilizer business 
and assess the sustainability of such improvement before considering a 
positive rating action. 

We could also consider an upgrade if the company maintains steady revenue 
growth, combined with EBITDA margins that exceed our expectations by more than 
four percentage points on a sustained basis, which could significantly improve 
credit measures, with a pro forma weighted average FFO to debt of above 45% 
even in industry troughs. To consider an investment-grade rating, we would 
also have to believe that management was committed to maintaining or improving 
credit measures, and that the potential for debt-funded transformational 
acquisition was remote. 
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