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Why Does CF Industries Have High Leverage?

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Dec. 4 2020, Updated 10:52 a.m. ET

Leverage increased

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.

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High leverage

Compared with other fertilizer producers, CF Industries has a relatively higher leverage ratio, which is at 2.4x. The average of its peer group in the above chart is 1.8x. Leverage is calculated by taking net debt over EBITDA (earnings before interest, tax, depreciation, and amortization). Net debt is the net of long-term plus short-term debt less cash and cash equivalents. CF Industries hold a Baa2 rating from Moody’s and a BBB rating from Fitch. Both ratings are considered investment grade, which means that it would be easier for CF Industries to borrow than for non-investment grade companies.

PotashCorp (POT) has a credit rating of A3, Agrium (AGU) has a credit rating of Baa2, and The Mosaic Company (MOS) has a credit rating of Baa1. All three companies, which are a part of the VanEck Vectors Agribusiness ETF (MOO) have an investment-grade credit rating. K+S has a credit rating of Ba1, which is also investment grade.

 

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