Fertilizer plant bonds are ‘junk,’ ratings service says
KENT DARR Dec 5, 2016 | 9:20 pm
3 min read time
707 wordsAll Latest News, Banking and Finance, Business Record Insider, Economic DevelopmentOne of these days, Iowa Fertilizer Co. LLC will produce 1.5 million to 2 million metric tons of fertilizer products a year, and it could use that cash flow to help offset some significant financing challenges, according to Fitch Ratings Inc.
Fitch said last week that the tax-exempt bonds issued for construction of the $1.9 billion plant in Lee County are in junk bond territory and their short-term outlook is not good.
One of the nation’s “big 3” ratings services, Fitch gave its B- rating to the 2016 Midwestern Disaster Area Revenue Bonds issued for the plant and placed them under a negative watch category. The 2013 series of those bonds also is under a negative watch.
All told, the Iowa Finance Authority has issued nearly $1.2 billion on behalf of Iowa Fertilizer Co., a firm whose corporate roots were planted in Egypt and later moved to the Netherlands. It has a corporate cousin, the Weitz Co., in Des Moines. Weitz is the construction manager on the fertilizer plant.
The series of bonds issued for the operation were authorized by Congress for states in the Midwest that were affected by the floods of 2008. Iowa was authorized to issue $2.6 billion. In 2010, acting on an opinion from the Internal Revenue Service, Iowa and other states determined that the bonds could be used by companies that did not suffer actual flood damage and they didn’t have to be located in areas of the state that had the most severe flood damage.
According to a Wall Street Journal analysis of federal flood relief efforts after the 2008 flooding, Lee County ranked 20th on the list of hardest hit Iowa counties.
Tax-exempt bonds typically are not reserved for private enterprise; these bonds offered the exception. Though Iowa Finance Authority is the issuer, OCI N.V., the company based in the Netherlands that took over the construction and fertilizer business of Orascom Construction Industries of Cairo, is responsible for repayment. The value of the bonds is that they can be issued at much lower interest rates than are available for other private financing. Orascom Construction bought Weitz in 2012.
Fitch points out that OCI N.V. has worked out repayment schedules with bond holders that stretch out the payback period to 2027 and allow for interest-only payments through the end of 2017.
In addition, OCI N.V. is cash-funding an additional $100 million for the project after contingencies were exhausted by construction delays, cost overruns and legal disputes with subcontractors.
Here’s part of the ratings analysis in Fitch’s own words:
“The ratings reflect that a limited margin of safety remains for repayment of the bonds, subsequent to the recent bond exchange. Along with the new issuance and exchange, bondholders agreed to a series of waivers and agreement amendments to resolve outstanding obstructions to project completion. While the maturity extension relieves near-term payment default risk on the uncompleted IFCo project, the facility could face ramp-up issues and is vulnerable to a volatile and potentially weak product pricing environment.
“The Negative Watch reflects the potential for further negative rating action as a result of any of the following factors: further material completion delays, early operational performance below expectations, or weakening in near-term product prices.”
All told, Iowa Fertilizer Co. has been awarded around $550 million in state, federal and local incentives, including nearly $110 million that has been approved by the Iowa Economic Development Authority in exchange for the creation of about 180 permanent jobs. Estimates of the number of construction workers at the site range up to 2,500.
Earlier this year, CF Industries of Deerfield, Ill., said it would drop a $5.4 billion acquisition of OCI N.V. that would have included the Wever plant after the federal government tightened guidelines on tax inversions, in which U.S. companies relocate their headquarters to a foreign address to lower their tax costs.
The $1.2 billion bond issue for Iowa Fertilizer Co. exhausted the $2.6 billion in disaster bonds that Iowa Finance Authority was authorized to issue, according to experts in the bond market. They note that the fertilizer project would be difficult to finance under current conditions, and they also say that few problems have been reported with the balance of the bonds that were issued.
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