NEW YORK -- Fitch Ratings today affirmed FertiNitro Finance Inc.'s (FertiNitro) rating at 'CCC'. The company, which was expropriated by the Venezuelan government in October of 2010, has US$250 million 8.29% of secured bonds due 2020 outstanding. The rating anticipates the timely payment of $44.7 million due October 1.
Removal of the Rating Watch Negative reflects that the Venezuelan government's expropriation of the project's assets last October thus far has not interfered with timely debt payment.KEY RATING DRIVERS
Reduced debt burden: Total annual debt service will decline from $91 million to $35 million in 2012 rising to a high of $50 million before the bonds mature in 2020.
Revenue Volatility: Both urea and ammonia prices are higher than 2009 and 2010 levels but are lower than highs reached in 2008. Fitch believes that consistently high operating performance is key to mitigating the impact of lower-price periods.
Improving but unstable operating performance: The below-budget capacity factor for the urea plant does not raise an immediate credit concern for debt payment in 2011. However, the rating is constrained by Fitch's concern about the potential for insufficient cashflow to support debt obligations in the years in which extended planned outages would occur due to lower capacity factors.
Continued sovereign and regulatory risks: The project has demonstrated an ability and willingness to meet debt obligations, although nationalization of the FertiNitro assets remains a concern. Requirements to sell fertilizer domestically at a fraction of global prices have not had an adverse impact to cash flow due to the low volume of local sales.WHAT COULD TRIGGER A RATING CHANGE
- Continued and sustained improvement in plant production levels and minimization of forced outages;
- Replenishment of the debt service reserve fund to equal six months of debt service;
- Domestic sales remain an insignificant portion of total sales;
- Changes to the offtake agreements; and
- Any further adverse impacts of government intervention.
Offshore accounts, project agreements, some real property and some real shares in FertiNitro.
FertiNitro's reduced debt burden provides needed financial relief given the project's exposure to volatile fertilizer prices, operating challenges, and government interventions.
Product Prices: Average annual ammonia and urea prices have varied substantially since 2006, underscoring the importance of mitigating this risk with stable operating performance. Ammonia prices have ranged from $216/Metric Ton (MT) to $506/MT (averaging $348/MT) with annual variations ranging from 75% to -57%. Urea prices show a similar pattern of volatility ranging from $223/MT to $416/MT (averaging $306/MT) with annual variations of 49% to -46%.
Operating Performance: Management has dedicated 2011 to investing resources to improve plant operating performance, after substantially reducing capital expenditures in 2010 to support debt obligations. FertiNitro reports it has invested in routine maintenance, overhaul activities, and acquisition of spare parts to reduce the duration of forced outages. Favorably, the capacity factor for the ammonia plant through July remains high at 90%, higher than the 77% average for the prior three years. The capacity factor for the urea plant is below the 79% budget level at 76%, but slightly higher than the 74% factored into Fitch's financial analysis. Fitch will look for progress toward higher and more stable capacity factors to support stable operations for both the urea and ammonia plants.
Nationalization: Fitch is concerned that subject to lenders' approval, long-term offtake contracts, with affiliates of Koch and Pequiven can be renegotiated or terminated prior to the expiration date if sponsor ownership interest is reduced to less than the 20% minimum. FertiNitro has previously reported no change to the existing offtake agreements.
FertiNitro, located in the Jose Petrochemical Complex in Venezuela, ranks as one of the world's largest nitrogen-based fertilizer plants, with nameplate daily production capacity of 1.2 million MT of ammonia and 1.5 million MT of urea. Of total revenues, 80% are derived from urea sales and the remainder from ammonia. FertiNitro was structured as 35% owned by a Koch Industries, Inc. subsidiary, 35% by Pequiven, 20% by a Snamprogetti S.p. subsidiary, and 10% by a Cerveceria Polar, C.A. subsidiary.Tea Party's Koch Brothers Sue Venezuela
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