CHICAGO – The bond-financed Iowa Fertilizer Co. project marked two milestones this month that may comfort investors who hold more than $1 billion of the project’s debt.

After construction and financing struggles, the company launched production this week and also reported that the Internal Revenue Service had closed an examination of its nearly $1.2 billion interim and nearly $1.2 billion permanent financing without a change in their tax-exempt status.

“The IRS had indicated that it had some concerns regarding the exclusion of interest on the bonds from gross income for federal income tax purposes,” the company reported in an April 12 notice filed on the Municipal Securities Rulemaking Board’s EMMA website.

Iowa Fertilizer Co. plant
The Iowa Fertilizer Co. project launched operations this week after overcoming a series of construction and financing challenges. The Weitz Co.

“The company now gives notice that the IRS has closed its examination of the bonds with no change to the position that interest paid to beneficial owners of the bonds is excludable from gross income for federal income tax purposes,” it continued.

IFCo launched operation at the $3 billion plant in southeast Iowa in a ribbon-cutting ceremony attended by Gov. Terry Branstad and local officials, who paved the way for the project with $100 million in state and $30 million in local public subsidies.

Officials touted the project as one of the largest private sector construction projects in Iowa’s history and the first world-scale, greenfield nitrogen fertilizer facility built in the country in more than 25 years that was worth the tax breaks because it creates thousands of jobs. Critics countered the money could have been better invested elsewhere.

“In Iowa, we have created a roadmap that attracts new businesses and supports key industries that drive long-term economic growth,” Branstad said.

The road to operations took longer than expected and faced financing and other contract obstacles.

The interim financing was sold in 2012 through the Iowa Finance Authority for construction of the nitrogen fertilizer plant that was developed by Orascom Construction Industries, which was originally based in Egypt and is now based in the Netherlands. The permanent financing sold in 2013.

The deal was one of the largest ever junk-rated private activity bond issues. It sold under the state's share of $14.6 billion of private-activity borrowing authorized by Congress for qualified projects in designated counties hit hard by storms in the spring of 2008. The bonds are secured by a first priority security interest in all tangible and intangible assets of the project and a pledge by Iowa Holding LLC of its membership interests in the Iowa Fertilizer Co.

Construction and cash flow troubles led Fitch Ratings last year to downgrade the bonds even deeper into junk at B-minus. About $148 million of new bonds carry the same rating.

The company received needed bondholder waivers to resolve construction contract issues and approval for a $150 million tender exchange that eased those pressures. "Through the bond exchange and consents, IFCo has alleviated near-term financial pressure on forthcoming debt payments," Fitch wrote.

Along with the new issuance and exchange, bondholders agreed to a series of waivers and amendments that allow the company to resolve major contractor disputes and claims.

In addition to the construction struggles, the company notified investors as part of the tender exchange that the IRS was examining the company's bonds. The examination involved the $1.94 billion interim 2012 financing and the $1.18 billion 2013 permanent financing.

In the company's notice about the tax examination, it reported that the IRS has indicated it is investigating and evaluating some concerns about the timing of the issuance of the 2012 bonds. It was looking at the manner in which the proceeds of the 2012 bonds were restricted for an initial period of several months from expenditure for the project financed by the 2012 bonds and the 2013 bonds.

It was also examining the fact that the proceeds of the 2012 paper prior to expenditure served as security for the payment of debt service on the 2012 bonds, and the refunding of the 2012 bonds by the 2013 bonds.

The bonds were structured with terms due in 2019, 2022, and 2025 with yields between 4.8% and 5.3%. Citi and Bank of America Merrill Lynch were underwriters and Dorsey & Whitney LLP was bond counsel.

The company still faces challenges in a volatile market for the nitrogen products it plans to sell to farmers, distributors, wholesalers, cooperatives, and blenders.

Nitrogen fertilizer pricing is tied to the price of feedstock, which may be oil, coal, or natural gas depending on the region and producer. Substantial declines in oil and natural gas prices have driven nitrogen prices to levels approaching 10-year lows.

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