Fitch Rates Monsanto's $800MM Sr. Unsecured Note Issuance 'A-'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'A-' rating to Monsanto Company's (Monsanto, NYSE: MON) proposed senior unsecured note issuance aggregating $800 million. A complete list of ratings follows at the end of this release.

The Rating Outlook is Stable.

The notes will be senior unsecured obligations and will rank equally with the company's $7.9 billion in principal amount of senior unsecured notes outstanding as of Feb. 28, 2015. Monsanto plans to use the net proceeds of the issuance for general corporate purposes including repurchasing shares of its common stock. The notes will have make whole call provisions as well as a put option upon a change of control and a downgrade of the notes below investment grade.

KEY RATING DRIVERS

Company Profile: The ratings reflect Monsanto's substantive market positions in corn, soybean, cotton and vegetables seeds and traits and crop protection products. The company has R&D-driven expertise in plant biotechnology and breeding that enables high profit margins and strong cash flows. The company's portfolio benefits from patent protection for most of its key products which creates high barriers of entry for new market entrants. In addition, Monsanto licenses its technologies and traits to its competitors. These agreements generate a recurring royalty stream that further supports the company's profitability.

Monsanto's operating profits are driven by its corn seeds and traits which accounted for about 46% of fiscal year (FY) 2014 gross profits. Corn planting in the U.S. is expected to be lower in 2015 than in 2014 given high stores and low prices, but soybean planting should benefit and Fitch expects overall 2015 operating profits to be flat with 2014.

Strong Profitability and Free Cash Flow. The company generated $4.4 billion of operating EBITDA in the latest 12 months (LTM) period ended Feb. 28, 2015, corresponding to 29% of net sales. Over the same period, operating cash flow after dividends and capital expenditures but before acquisitions (FCF) was approximately $724 million. The company guides to FY 2015 free cash flow (defined as the total of cash flows from operating activities and investing activities) at the low end of $2 billion to $2.2 billion and Fitch believes FY 2015 FCF will be at least $1.3 billion.

Moderate Financial Leverage: Pro forma for the $750 million note issuance, total debt to operating EBITDA for the period was 2.1x. Fitch expects financial leverage to remain at or below 2x on a gross basis on average which is consistent with Monsanto's net debt to EBITDA target of 1.5x.

The rating is constrained by the company's share buyback program and sizeable dividends. As of Feb. 28, 2015, Monsanto had about $4.4 billion remaining under the June 2014, $10 billion, two-year, share repurchase program. Fitch expects Monsanto to balance share repurchases with investment opportunities to retain its target capital structure of 1.5x net debt/EBITDA.

Solid Liquidity: Fitch notes that the February quarter is a seasonal FCF negative quarter. The company's liquidity, pro forma for the new credit facility, totaled approximately $5.7 billion at Feb. 28, 2015 with available cash at $2.7 billion and full availability under the company's $3 billion revolving credit facility due March 2020. As of Feb. 28, 2015, commercial paper outstanding was $169 million, accrued marketing programs were $1.3 billion and deferred revenues were $1 billion. The revolver has a maximum consolidated leverage ratio (substantially total debt/EBITDA) of 3.5x. Fitch expects the company to remain in compliance. Estimated maturities of long-term debt over the medium term are $300 million in FY 2016, $900 million in FY 2017, $300 million in FY 2018 and $800 million in FY 2019.

The Stable Outlook is based on robust operating performance and expectations for long term sales and earnings growth. Fitch expects Monsanto to continue to generate substantial positive FCF in most fiscal years and to maintain a strong credit profile appropriate for an R&D-driven company.

KEY ASSUMPTIONS

--Low sales growth in FY 2015 to reflect high grain stores and lower planted acreage;

--Sales growth beyond FY 2015 improving to 6%;

--EBITDA margins flat in 2015, improving modestly thereafter on greater seeds and traits sales and lower relative GA and R&D;

--Capital expenditures of $1.2 billion in FY 2015 dropping to $1 billion thereafter;

--Debt and FCF share repurchases consistent with net debt/EBITDA target of 1.5x and minimum readily available cash of $2 billion.

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

--Total debt/EBITDA declines on a sustained basis below 1.25x.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

--Total debt/EBITDA increases on a sustained basis above 2.25x;

--Liquidity, of which cash is at least $2 billion, less than $3 billion;

--Regulatory actions that threaten Monsanto's business model.

Fitch currently rates Monsanto as follows:

--Long-term IDR 'A-';

--Senior unsecured revolving credit facility 'A-';

--Senior unsecured debt 'A-';

--Short-term IDR 'F2';

--Commercial paper 'F2'.

The Rating Outlook is Stable.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 2014);

--'North American Chemicals 2015 Outlook' (December 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

2015 Outlook: North American Chemicals (Strong Domestic Growth)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=835189

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=982558

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Contacts

Fitch Ratings
Primary Analyst
Monica M. Bonar
Senior Director
+1 212-908-0579
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Gregory Fodell
Associate Director
+1 312-368-3117
or
Committee Chairperson
Mike Simonton, CFA
Managing Director
+1 312-368-3138
or
Media Relations, New York
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com
or
Media Relations, New York
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Monica M. Bonar
Senior Director
+1 212-908-0579
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Gregory Fodell
Associate Director
+1 312-368-3117
or
Committee Chairperson
Mike Simonton, CFA
Managing Director
+1 312-368-3138
or
Media Relations, New York
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com
or
Media Relations, New York
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com