Fitch Ratings (Fitch), New York, is concerned over the outlook of FertiNitro Finance Inc. (FertiNitro) maintaining a rating of its US$250 million 8.29 percent bonds, due 2020, at “CCC,” with a Rating Watch Negative.
Fitch said the rating reflects FertiNitro’s payment March 29 of $39.5 million in semi-annual debt service. Fitch said the payment, due April 1, prevents further decline to FertiNitro’s rating. The rating also takes into account information provided by management that the cash flow for the current payment was generated from plant operations, rather than cost reductions and capital investment deferrals that enabled the October 2009 debt payment. Fitch expects rating pressure to remain through 2011, when the project reaches its maximum annual debt service requirement. The subsequent decline in debt service coincides with the maturity of bank debt separate from the secured bonds.
The Rating Watch Negative status remains as near-term pressures could adversely affect FertiNitro’s ability to make its next debt payment of $38.8 million, due Oct. 1, 2010. Specifically, the combination of weaker ammonia and urea prices since 2008 and a history of lower-than-expected production levels contribute to Fitch’s view of FertiNitro’s distressed financial position and limited debt service capacity in 2010. Fitch said that while management reports that it will have a modest cash balance to support operations, the debt service reserve fund is depleted as a result of the March 29 debt payment. Based on Fitch’s Rating Criteria for Infrastructure and Project Finance, dated Sept. 29, 2009, Fitch projects a 2010 debt service coverage ratio of 0.77 times (x), indicating that without sponsor support or sustained improvements in plant operations, the project may not have enough cash available for the next debt service payment.
Since urea makes up 80 percent of project revenues, Fitch is concerned by the volatility in urea prices. Urea prices fell to a low of $181/mt in June 2009 from a high of $693/mt in August 2008. In 2009 the average price was $223/mt, down from the 2008 average of $416/mt. These prices reflect the blend of selling domestically at the official price of $72.19/mt per the May 2007 government decree, and of exporting at international market prices. For ammonia, prices declined to a low of $81.60/mt in January 2009 from a high of $852.48/mt in September 2008. Ammonia prices averaged $216/mt in 2009, down from $506/mt in 2008.
Fitch said additional financial pressure derives from the requirement that FertiNitro supply urea to the Venezuelan market at a price of about $36.00 mt, half of the $72.19/mt price in 2009 before the currency devaluation. Mitigating this concern is that actual urea shipments in 2009 were approximately 122,000 mt below the budget estimate of 175,000 mt. In 2009, domestic urea sales were 10 percent of the total volume of 1,204,914 mt.
Fitch also says it is uncertain that FertiNitro will be able to perform at projected production levels (85 percent of capacity for ammonia and 83 percent of capacity for urea) absent planned capital expenditures of nearly $20 million in 2010, which are partly derived from deferring a portion of investments planned for 2009. In 2009 the production versus nameplate capacity was 78 percent for ammonia and 74 percent for urea, consistent with 2008 results and below 2007 levels of 83 percent for ammonia and 81 percent for urea.
Recent legislative action has increased uncertainty regarding the potential for additional government intervention, according to Fitch, noting that in June 2009, the Official Gazette 39,203 for the Development of Petrochemical Activities law was approved by the Venezuelan National Assembly. The law gives Pequiven the right to manage basic and intermediate petrochemical activities-related companies. The right could be executed directly by the state-owned company or via mixed enterprises, through which Pequiven decision making and participation in the project could increase to at least 50 percent.
Fitch said it will monitor the following key drivers that could affect FertiNitro’s rating: ability and willingness to make the next debt service payment; plant production levels and minimization of forced outages; trend in urea and ammonia prices; domestic sales trend in relation to management’s budget; and impact of additional government intervention.
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 3,600 mt of ammonia and 4,400 mt of urea. FertiNitro is owned 35 percent by a Koch Industries Inc. subsidiary, 35 percent by Pequiven, 20 percent by a Snamprogetti S.p.A. subsidiary, and 10 percent by a Cerveceria Polar C.A. subsidiary.