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Is Intrepid Potash Headed toward Bankruptcy?

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Default risk

Falling potash prices have created a significant amount of uncertainty for global potash producers. Falling prices affect Intrepid Potash’s (IPI) EBITDA (earnings before interest, tax, depreciation, and amortization), exposing the company to a risk of default.

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Intrepid Potash’s covenants

The company is subject to the following covenants:

  • The fixed charge coverage ratio should not fall below 1.3 to 1.
  • The leverage ratio must not exceed 3.5 to 1.

EBITDA are used to calculate both the fixed charge and the leverage ratios. In its 10-K annual filing, Intrepid Potash (IPI) stated, “EBITDA levels will not be sufficient for us to maintain compliance with these financial covenants through 2016.” This would lead the company to breach its covenants, and the company would be in default.

Besides the above covenants, the company’s financial statements must not contain changes to its “going concern” language. Going concern essentially means that the company is unable to generate enough resources to continue its operations indefinitely. In the latest financial statement, the company’s independent auditors expressed “substantial doubt” about Intrepid Potash’s ability to carry on as a going concern, which constitutes a change in going concern language and puts the company in default.

What may happen?

Following changes to going concern language, the company is in default. However, during its 4Q15 earnings call, management stated, “We have obtained a 30-day waiver as to the going concern language.” This waiver will give the company some time to renegotiate with its lenders. If Intrepid Potash is unable to negotiate a new deal with its lenders, then a bankruptcy may be on the cards. This explains why the company’s share price fell 55% from $2.22 to $0.99 after the earnings.

You can gain exposure to agricultural fertilizer companies without investing directly in a company’s stock by investing in the iShares U.S. Basic Materials ETF (IYM). Mosaic (MOS), CF Industries (CF), Monsanto (MON), and Dow Chemical (DOW) account for ~23.6% of IYM. Such a diversified portfolio helps mitigate company-specific risks.

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