OREANDA-NEWS. Fitch Ratings has affirmed Australia-based Incitec Pivot Limited's (IPL) Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB'. The Outlook is Stable.

The notes issued by Incitec Pivot Finance LLC are also affirmed at 'BBB'. Incitec Pivot Finance LLC (IPF) is a subsidiary of IPL and IPF's debt is guaranteed by IPL and several of its subsidiaries.

KEY RATING DRIVERS
Strong Cost Position: The economies of scale achieved by IPL has put it at the lower end of the global explosives and fertiliser cost curves, meaning that its margins are protected by the weaker economics of marginal cost producers. IPL is a leading manufacturer of ammonium nitrate and initiation systems.

Rising Cost of Australian Gas: The rising cost of natural gas on the east coast of Australia will likely weaken IPL's cost position in fertilisers. IPL incurred a AUD50m per annum increase in gas costs at its Phosphate Hill plant from February 2015 and is addressing these rising costs, including signing non-binding heads of agreement for future supply, to limit cost increases. Should these deals not proceed, Fitch expects a similar cost step-change (AUD60m) from financial year 2019 (FY19, to September), following the maturity of gas supply contracts at the Gibson Island production facility.

Cashing in on Louisiana: Fitch expects IPL's ammonia plant in Louisiana, USA, to generate annual EBITDA of AUD60m in FY16 and AUD290m from FY17. The depreciation of the Australian dollar and higher forecast ammonia prices, which, in part, reflect the postponement of increased US ammonia capacity, has improved the business case for Louisiana.

The main threat to this cash flow is the market risk associated with the natural gas feedstock to the plant, which is unhedged (noting that the plant's construction costs are fixed). A portion of the gas price risk is effectively hedged due to some of the manufactured ammonia (up to 38%) being used by IPL to produce explosives which are generally sold with a gas rise and fall. IPL takes an active approach to managing gas price risk and has currently established a small base level of gas hedging for the early years of operation. The US natural gas prices are much lower than those in Europe, due to the sharp increase in shale gas extraction in the US, resulting in a much wider ammonia production margin in the US than in Europe, which underlies the business case for this investment.

Market Risk Exposure: IPL's earnings are leveraged to global commodity demand and supply. Core production competency is in heavy nitrogen-based chemicals, which are a core ingredient of commercial explosives (ammonium nitrate) and fertilisers (urea, MAP, DAP). These products are commodities with global production; hence differences in regional economics and volatile demand-side drivers can clearly affect prices.

Foreign Currency Exposure: IPL's profitability is expected to benefit from the depreciation of the Australian dollar, while currency hedges will negate an increase in the translated value of outstanding USD-denominated debt. In addition, Fitch expects the step change in profitability following the commencement of operations in Louisiana in 3Q16 to provide additional support to the USD-denominated debt outstanding, particularly post-payback of the investment.

KEY ASSUMPTIONS
Fitch's key assumptions with our rating case for the issuer include:
- Australian dollar-US dollar exchange rate at 0.79 in FY15 and 0.75 thereafter;
- Capex of AUD460m in FY15, AUD400m in FY16 and subsequent years at maintenance levels of around AUD200m;
- NOLA Urea prices of USD283 per tonne in FY15 and USD255 per tonne thereafter;
- DAP prices of USD452 per tonne in FY15 and USD454 per tonne thereafter; and
- Ammonia prices of USD460 per tonne in FY15 and beyond

RATING SENSITIVITIES
Negative: Possible negative rating action may be taken should IPL's deleveraging process not continue in line with Fitch's expectations, such that: (i) FFO Adjusted Leverage remains above 3.0x on a sustained basis; or (ii) FFO Fixed Charge Cover remains below 4.5x on a sustained basis. This may occur if there are delays on the Louisiana project or further material cost erosion in Australia.

Positive: A ratings upgrade is unlikely over the next 24 months as IPL completes its investment in Louisiana and turns ex-capex. Once Louisiana comes on line, IPL's exposure to the more volatile fertiliser business will diminish significantly and this will have a positive impact on IPL's business risk profile should its financial metrics remain stable. Concerns with this, however, are IPL's acquisition-led growth or the potential for any shareholder friendly activity.

FULL LIST OF RATING ACTIONS
Incitec Pivot Limited:
- Long-Term IDR affirmed at 'BBB' with Stable Outlook; and
- Long-term rating on senior unsecured debt affirmed at 'BBB'

Incitec Pivot Finance LLC:
- Senior Unsecured notes due 2019 affirmed at 'BBB'.