CF Industries’s Recent Expansion Projects and Its Leverage Burden




Previously, we saw that CF Industries (CF) acquired OCI and that the company’s expansion projects are slated to come online in the later half of 2015 and in 2016. With an increased capital expenditure and declining operating cash flows, CF Industries has resorted to leverage to fund its projects, which are expected to create more nitrogen capacity and, in turn, benefit shareholders.

  • CF Industries currently has a leverage ratio, which is calculated as net debt to EBITDA, or earnings before interest, tax, depreciation, and amortization, of 1.83x, which has increased significantly since 2013. VanEck Vectors Agribusiness (MOO) invests 3.7% of its holdings in CF and 4.3% of its holdings in Agrium (AGU).
  • CF Industries took on significant debt in 2010 and recently added $2 billion in debt for the OCI acquisition. This has led to higher debt levels than in the past.
  • The average industry leverage ratio stands at 1.17x EBITDA, with Yara International’s leverage ratio at 0.58x, PotashCorp’s (POT) at 1.25x, and Mosaic’s (MOS) at 0.73x.
  • CF’s current interest coverage ratio stands at 15.48x. Yara International has an interest coverage ratio of 12.2x. However like CF, PotashCorp and Mosaic have high interest coverage ratios of 15.4x, and 16x, respectively.
  • The company’s interest coverage (EBITDA divided by interest expense) is above its peers’ average of 12.6x.
  • This means that although CF’s leverage ratio is higher than its peers’ average, CF is in a better position to honor its interest expense.
  • It may also indicate that the company can take on additional leverage.

Next, we turn our attention to the company’s valuation and how it has changed over time.

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