Market Post: Iowa Fertilizer Rallies as Trading Spikes

Bids for Iowa Fertilizer project bonds were strong on Tuesday, continuing a month-long rally, agreed traders.

Tuesday alone saw $39.11 million traded on the project's 5s of 2019 as yields contracted to 3.71% from 4.02% last week, according to data provided by Municipal Securities Rulemaking Board's disclosure website EMMA. Yields on the tranche have been range bound between 3.71% and 4.14% in September, a deep discount to initially offering yield of 4.8%, according to EMMA.

Traders were mixed on what was prompting the activity and whether it was market or event driven.

"If people are looking to take beta off the books, Iowa Fertilizer is one of the go-to names to sell, along with Foothills and Poseidon," said a New York based trader. "It's fairly liquid and has performed well since issuance."

In the current municipal marketplace of low rates and limited supply, Iowa Fertilizer emerges as one of the few high yield bonds, "if you could even call it high yield," noted a Midwest based trader.

"It's an Egyptian based company, new construction, and a little behind schedule. At these yields you aren't remotely getting compensated for the risk," the Midwest trader said. Iowa Fertilizer's parent company is Middle East giant Orascom Construction Industries.

A monthly construction report released Tuesday indicated the project's status was 67.30% complete, slightly behind a 70.03% projection.

"Considering it's a $1.8 billion deal, that's not terrible," the Midwest trader added.

After a dominant summer, trading on the typically liquid Series 2013 Iowa Fertilizer Project bonds rebounded in September, with $189.57 million in total trades recorded across all three of the projects tranches as of Sept. 30, according to EMMA. The bonds haven't received this much attention in the secondary market since January 2014 when $299.94 million in trades were recorded, according to EMMA.

However, a looming change of control and the uncertainty surrounding it may be causing the trading activity, said a second New York based trader and a legal source close to the situation.

A sell-side equity report from Bank of American/Merrill Lynch last October indicated that OCI Partners, a variable-rate master limited partnership majority owned by Orascom, was considering a long-term objective to "drop down" the Iowa Fertilizer project, potentially changing the classification of the project's debt service expense, according to trade publication Debtwire Municipals. The report deemed the MLP a "buy" and OCIP's shares enjoyed a rally until the end of December when it hit a high of $28.

Since then, OCIP has not completed the drop down of Iowa Fertilizer and its shares have steadily fallen, said the bondholder. The shares opened at $20 on Tuesday, up from its $19 price at initial public offering last October.

The recent spike in trading could be linked to news surrounding the drop down, which all traders and the source close described as "inevitable."

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