Fitch Downgrades FertiNitro Finance to 'CCC'; Rating Watch Negative.

NEW YORK -- Fitch Ratings has downgraded FertiNitro Finance Inc.'s (FertiNitro) US$250 million 8.29% secured bonds due 2020 to 'CCC' from 'B-' and placed the rating on Rating Watch Negative.

The downgrade considers the effect of Decree-Law No 5,218 of March 6, 2007, which forces FertiNitro and other producers of nitrogen-based fertilizers in Venezuela to direct their output from global exports markets to the domestic market, where sales are subject to pricing dictated by the government. According to the offtake agreement between Petroquimica de Venezuela, S.A. (Pequiven) and FertiNitro, Pequiven is obligated to re-sell, on a gradually decreased percentage, its 50% share of the plant's production outside Venezuela at market prices. Fitch believes that the decree-law is likely to cause project revenues to decline substantially.

Fitch estimates that as little as half (approximately 445,797 metric tons) to as much as all (810,540 metric tons) of Pequiven's urea offtake could be redirected to the domestic market. Local demand for urea remains unknown but it is evident that Pequiven's wholly-owned plants in the El Tablazo and Moron complexes are not producing sufficiently to satisfy domestic requirements. Given the government's stance on agricultural development and the designation of nitrogen fertilizer production as 'strategic,' Koch Nitrogen's share of FertiNitro production could also be subject to redirection. Uncertainty associated with the ultimate volume of diverted output ordered by the decree underpins the Rating Watch Negative status.

The decree-law effectively dismisses the economic basis of the project: the plant was conceived and developed to convert associated natural gas of Petroleos de Venezuela S.A. into ammonia and urea, with export sales of these products generating dollar revenue for Pequiven. Price controls will diminish the economic viability of FertiNitro. According to the law, the redirected output must be sold in local currency for the equivalent of $72 per metric ton. This price ceiling falls significantly below FertiNitro's cost of producing one metric ton of urea and constitutes only one-fourth of the current market price.

The ratings downgrade also considers that the plant failed to pass the second reliability test which was deferred in 2003 until December 2005 and completed in May 2006. The test is designed to demonstrate and ensure that the project has the ability to operate as initially represented to bondholders. According to the independent engineer's opinion that was released in the first quarter of this year, material manufacturing defects in the ammonia plants are likely to cause unplanned downtime in the urea trains that exceed expected levels. Fitch anticipates that future ammonia and urea shipments can only approximate the monthly average observed during the 2002-06 period. Namely, recent improvements in the plant's operating rate are likely to be short-lived. In consideration of the engineer's observations and in compliance with the terms of debt, FertiNitro paid $50 million of principal on the senior bank loans in November 2006 in order to preserve the equilibrium between the project's output capability and debt sustainability. The outstanding balance of bonded debt remains at $250 million, as the bonds are not scheduled to begin to amortize until April 1, 2011.

Consistent with strong prices in 2006, collections rose 19% to $389.4 million; operating cash flow amounted to $173.5 million. After-tax income increased to $53.3 million on revenues of $403.3 million, the fourth consecutive profit achieved since 2003. Despite the disbursement associated with the debt reduction in November, cash balances remained at approximately $110 million at the end of the year, including a debt service reserve of $62.1 million. Notwithstanding the reduced debt burden, Fitch anticipates that the decree-law will substantially diminish FertiNitro's capacity to meet future debt obligations. The law's effect during the remainder of 2007 should be relatively modest, but Fitch expects that a debt payment default will occur by 2009 or earlier. The magnitude of the project's revenue loss and the timing of the payment default will depend directly on the speed at which output volumes are diverted by the government.

FertiNitro ranks as one of the world's largest nitrogen-based fertilizer plants, with nameplate daily production capacity of 3,600 metric tons of ammonia and 4,400 metric tons of urea. It is owned 35% by a Koch Industries, Inc. subsidiary, 35% by Pequiven (a state-owned petrochemicals company), 20% by a Snamprogetti S.p.A. subsidiary, and 10% by a Cerveceria Polar, C.A. subsidiary.

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