CHICAGO – The Iowa Fertilizer Co. LLC's successful receipt of bondholder waivers and completion of a $150 million tender exchange eases pressures on the struggling project.

"The ratings reflect that a limited margin of safety remains for repayment of the bonds, subsequent to the recent bond exchange," Fitch Ratings said in a report last week that followed the late November closing of the exchange on a portion of the deal's 2019 maturity. Fitch rates the debt, issued through the Iowa Finance Authority, B-minus.

"Through the bond exchange and consents, IFCo has alleviated near-term financial pressure on forthcoming debt payments," the agency 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.

Iowa Fertilizer construction and cash flow troubles led Fitch in November to downgrade deeper into junk almost $1.2 billion of project bonds ahead of a proposed tender. Fitch lowered the rating two notches from B-plus and put the bonds on negative watch. About $148 million of new bonds carry the same rating and join the existing debt on negative watch.

About $1.156 billion of the permanent financing remains outstanding.

Fitch rated the bonds BB-minus when they were issued as long-term debt in 2013.

The bonds were sold to finance construction of nitrogen fertilizer plant in southeast Iowa being developed by Orascom Construction Industries of Egypt. The private activity bonds were sold under the federal government's Midwestern Disaster Area Bond designation.

In its latest investor notice, the company said the amendments and exchange "will give Iowa Fertilizer Company more flexibility going forward and will reduce its third party debt obligations over the next 18 months by $142 million, providing a significantly improved liquidity profile as the facility begins operations."

The company received consent to its proposed consents and waivers from holders of 95% of its existing Series 2013 bonds. The company successfully sought the exchange of $147 million of its $390 million in 2019 term bonds. The purchase price for the tendered 2019 term bonds was 103% of par.

About $48.5 million of bonds now mature in 2026 and $98.6 million of bonds in 2027. Interest only is paid until 2026. The tender eliminates sinking fund payments due this month and in 2017. The new bonds carry a coupon of 5.875%, par plus a premium. Citi was dealer-manager for the tender.

The latest development provides some breathing room.

"Construction of the plant continues to trail behind schedule and there remains the potential for further delays," Fitch said. "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 project's latest projections anticipate ammonia operations beginning in the first quarter.

In addition to construction struggles, the company notified investors in a disclosure filing last month as part of the tender exchange that the Internal Revenue Service is examining the company's bonds. The examination involves a $1.94 billion interim 2012 financing and the $1.18 billion 2013 permanent financing that took the interim financing out, all sold through the Iowa Finance Authority.

The company reported in its November filing that the "IRS has not informed the authority or the company that it has made an 'adverse determination' regarding the tax exempt status of the 2012 Bonds or the 2013 Bonds."

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 and is examining 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, 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.

Secondary market prices were down slightly in some recent trades on some of the longer bonds in the 2013 sale but still near or at full value.

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 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.

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 rating could fall further if the project sponsor fails to relieve near-term financial pressure, has further material completion delays, early operational performance is below expectations, or near-term product prices weaken.

The company faces 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.

Once operational, Fitch said it anticipates that relatively high equity distribution triggers will support debt repayment and replenishment of reserves during potential periods of low operating cash flow.

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