CHICAGO – The Indiana Finance Authority is coming to market Thursday with $1.26 billion of Midwestern Disaster Area Bonds, in the largest deal to date for the soon-to-expire program and one of two large borrowings to finance Midwest fertilizer plants hitting the market this week.
The two new facilities are among the first fertilizer plants to be built in the U.S. in more than 30 years as part of a rebound of the domestic nitrogen fertilizer industry.
The $1.259 billion deal will be issued through the Indiana Finance Authority on behalf of Midwest Fertilizer Corp., which is owned by one of Pakistan’s largest conglomerates.
The bonds price Thursday, two days after Tuesday’s sale of $1.2 billion Midwestern disaster area bonds by the Iowa Finance Authority for the Iowa Fertilizer Co.
Both borrowers are hurrying to market to take advantage of the federal disaster area bond allocation before it expires at the end of 2012.
In both cases, the short-term structure with mandatory tenders allows the companies time to qualify for the disaster area bond program before it expires while allowing them time to finalized many of the contracts and negotiations for their plants before they convert to a longer-term financing.
Guggenheim Securities LLC is the underwriter on the Indiana deal. Ice Miller LLP is bond counsel.
Like the Iowa deal, proceeds will be escrowed and used to buy U.S. securities.
Standard & Poor’s assigned its top short-term rating of A-1-plus to the debt based on the escrowed collateral, and expects to withdraw the rating at the mandatory tender next July.
The Midwest Fertilizer Corp. will use the proceeds next year to set up a nitrogen fertilizer manufacturing company in Posey County.
The company is still finalizing the final site and other key aspects of the deal, according to bond documents. Posey County officials said they had little detail on the plan, and that there had been no public hearings or measures heard by the board.
Another fertilizer manufacturing company is set to be built in nearby Spencer County, where Ohio Valley Resources LLC has filed an air emissions permit application with the Indiana Department of Environmental Management.
The three new plants are among the first that are being built in the U.S. since the early 1980s, said a member of an industry association group.
Natural gas prices have dropped as domestic production booms through new drilling techniques like fracking. That in turn is sparking a rebound in domestic fertilizer production, which declined 50% between 2001 and 2007 as production shifted overseas. Natural gas is a major feedstock for fertilizer production.
“There has not been a new fertilizer plant built in this country since the early 1980s, and before that the true big activity in terms of building and starting production was in the 1960s,” said Kathy Mathers, vice president of public affairs for industry trade group The Fertilizer Institute.
“It’s been a good long time since we’ve seen the expansion we’re seeing now,” she said.
The industrial development revenue bonds feature a mandatory tender on July 1, 2013 with a final maturity of 2046.
The Indiana Finance Authority is acting as conduit issuer on the deal, and will not likely be involved in the rollover into longer term debt next summer.
This week’s deal marks the state’s largest borrowing under the program, and the IFA’s largest deal in recent memory, said James McGoff, general counsel for the authority, who is also in charge of many of the authority’s bond programs.
The Midwestern Disaster Area Bond program allows the use of tax-exempt bonds for qualified privately owned projects that generate jobs and economic activity in Midwestern counties hurt by weather-related damage in 2008.
The program allocates tax-exempt private-activity bonds that don’t count against a state’s volume cap: $2.6 billion to Iowa, $3.8 billion to Wisconsin, $1.4 billion to Missouri, $1.5 billion to Illinois, $3.1 billion to Indiana, $849 million to Nebraska, and $957 million to Arkansas.
Iowa has exhausted all of its $2.6 billion allocation, but Indiana expects to have roughly $800 million remaining of its original $3.1 billion allocation, according to McGoff.
“Unless we have an abundance [of borrowers] come out at the final meeting in December, we will have roughly $800 million remaining that will expire,” McGoff said.
Interest in the program picked up in 2012, he added.
“I would guess it’s the companies’ ability to use the financing as the economy has recovered,” McGoff said. “There’s been much more demand for it recently than when the program came out, and as the knowledge of the program has built it has become more popular.”
Despite the $800 million that will be left on the table, the IFA considers the program a success that answered a need in the state, he said.
Forty of Indiana’s 92 counties, including Posey, were declared disaster areas after the spring storms of 2008. Once a county is identified as a disaster area, private companies located there became eligible for tax-exempt financing for a broad range of projects.
Though similar to private-activity industrial development bond issues, the program extends tax-exempt benefits to projects and developments that might otherwise run afoul of the tax code.
In mid-2009, the Iowa Finance Authority was the first in the Midwest to issue the bonds, followed by the Wisconsin Health and Educational Facilities Authority.