CHICAGO — Construction on the $1.8 billion partially bond-financed Iowa Fertilizer Co. project is slightly behind schedule due to the harsh winter but the project is making "timely progress" and commodity price expectations remain on target, according to Fitch Ratings.

The rating agency in a May 8 report affirmed its BB-minus rating, three notches below investment grade, and stable outlook on $1.19 billion of revenue bonds issued by the Iowa Finance Authority to finance construction of the nitrogen fertilizer plant in southeast Iowa.

The bonds were sold on behalf of the developer, owned by Cairo, Egypt-based Orascom Construction Industries. The company made an equity contribution of $581 million to the project. The project also received other local and state subsidies.

The private activity borrowing marked one of the largest junk bond rated PAB issues when it sold in the spring of 2013 under the federal government's Midwestern Disaster Area Revenue bond program. Those bonds took out short-term financing completed before the $14.6 billion 2008 federal program expired at the end of 2012. Counties in Arkansas, Indiana, Illinois, Iowa, Missouri, Nebraska and Wisconsin were eligible.

"The rating affirmation is based upon the project's construction progress and the expectation that operational cash flow will be sufficient to repay outstanding debt obligations," Fitch wrote. "After a harsh winter, the project is slightly off schedule, but is expected to meet the Aug. 15, 2015 mechanical completion date and the Nov. 15, 2015 provisional acceptance date."

The engineering and procurement phases are on schedule, while the construction phase is slightly behind its timeline as the pouring of some concrete for the project was delayed due to weather conditions in December and January. Overall costs remain in line with the budget.

Change orders have been manageable and are expected to total about $42 million, leaving about $63 million available in a contingency fund, Fitch wrote.

The plant will produce ammonia, urea, urea-ammonium nitrate, and diesel exhaust fluid. The company will sell its products at market prices to farmers, distributors and others.

Fitch said it believes the company will benefit from favorable pricing in the medium-term.

Natural gas prices also pose a risk as the project will use natural gas feedstock via an existing pipeline. The company has entered into natural gas call swaptions for the first seven years. The project will fund from operations, over seven years, an annual $25.8 million reserve requirement to provide liquidity and help mitigate price risk during the non-hedging period.

Fitch said operating risks are manageable as the project is using commercially proven technologies with relatively low maintenance risk. It also benefits from a fixed-price construction agreement.

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 sale last spring was met with sharp demand even as it faced headwinds from negative headlines that followed the explosion of a Texas fertilizer plant that killed 14 and injured more than 100. The finance team sought to allay investor fears by providing information that the plant would not produce the more explosive material that contributed to the explosion.

Citi and Bank of America Merrill Lynch underwrote the bonds.

The project is expected to create 165 permanent jobs once completed and result in an estimated $740 million in annual savings for farmers because of reduced import costs.

Posey County, Indiana has also issued short-term financing for a similar project. Permanent financing on the $1.26 billion deal is expected later this year.

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