Fitch Affirms Cargill's Issuer Default Rating at 'A'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed Cargill, Incorporated's (Cargill) Issuer Default Rating (IDR) at 'A'. The ratings apply to approximately $11.9 billion of total outstanding debt. The Rating Outlook is Stable.

A full list of affirmed ratings follows at the end of this release.

KEY RATING DRIVERS

Debt Reduction Compensates EBITDA Compression: Cargill achieved leverage (total debt to EBITDA) reduction within Fitch's expectations for fiscal year (FY)2015 at 2.5x by decreasing the long-term debt load by $1.5 billion to compensate for a nearly 3% compression in EBITDA to $4.9 billion. Although leverage has been reduced by 0.4x at the latest-12-month (LTM) period ended Aug. 31, 2015, versus Cargill's FY ended May 2014, the stagnation of earnings generation over the last few years is an important credit concern. An expectation for a sustained benign commodity pricing environment is protective of the credit profile while Cargill attempts to execute on a business strategy that includes portfolio refinement and cost efficiency initiatives to boost EBITDA generation in the long term.

Consistent Commodity Pricing: Cargill's diverse geographic and logistic operations across virtually all key commodities offers substantial protection from volume fluctuations from changing demand dynamics or supply disruption of any specific marketplace or product line. Crop harvests since the drought year in 2012 have been large in key growing regions resulting in extensive global stockpiles that have keep commodity pricing volatility at a minimum.

Muted commodity pricing fluctuation reduces working capital requirements as processors purchase lower-cost inventories; accordingly, Cargill's short-term debt (excluding current maturities) has held at around $2.6 billion since FY2014, further supporting Fitch's expectation of a stable debt load. Currently, the USDA estimates growing worldwide supplies for most key agricultural commodities that should once again mitigate significant movement in pricing over the next crop cycle.

Executing Business Strategy: A key component of Cargill's business strategy is portfolio enhancement, accomplished via acquisition and internal investment and by divesting non-core businesses. Recently, the company's agricultural nutrition portfolio was broadened with the purchase of EWOS, a leading salmon feed producer that greatly expanded the company's existing offering that catered to tilapia and shrimp. The transaction conforms to Cargill's strategy of finding new complexes, such as aquaculture, which have adjacencies with the company's present portfolio.

On the other hand, striving for profitable growth led to the divestment of certain businesses like the U.S. pork processing operations that lacked scale to drive profitability improvement, and its interest in the North Star joint venture back to its partner, exiting the non-core steel industry. Fitch sees Cargill continuing to enhance its corporate portfolio through tuck-in asset purchasing that will build upon adjacencies, which Fitch feels can be managed with present cash flow generation.

Commitment to Restructuring: Another important cog in Cargill's strategy to seek profitable growth is operational efficiency, especially as earnings have drifted lower over the past years. In FY2015, the company successfully established six centers for global shared services, which Cargill hopes will allow it to reduce its current footprint of back office operations. Cargill expects significant savings over the intermediate term as it minimizes duplicate expenses and the service centers are better utilized. In addition, the company is looking at its supply chain, sales and marketing effectiveness, customer pricing, and updating plant operations as further sources of long-term cost savings. Fitch forecasts only minor margin enhancement from these activities in Cargill's FY 2016 - 2017, but expects more benefit starting in FY2018 as costs savings achieved begin to outweigh restructuring expenses.

RMI Supports Ratings: In addition to evaluating traditional leverage metrics, Fitch also considers leverage ratios that exclude debt used to finance readily marketable inventories (RMI). RMI is primarily hedged and very liquid. Including Fitch's discretionary 10% haircut to reported RMI, RMI adjusted leverage was 1.0x for the LTM period ended Aug. 31, 2015. RMI adjusted metrics are generally strong in the 1.0x to 2.0x range for the rating level even when the company experiences pressure on its operating earnings and cash flow.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for Cargill include:

--Consolidated revenue drops by a CAGR of 3.5% from FY2015 to FY2017 given a sustained low commodity pricing environment;

--Consolidated EBITDA and EBITDA margin approximate $4.9 billion and 4.3%, respectively in FY2016, consistent with operating performance in FY2015 as the company seeks to achieve cost efficiencies while integrating new assets, notably EWOS. Fitch sees modest EBITDA margin expansion from cost savings and the higher-margin acquired businesses;

--Total debt to EBITDA maintained around 2.5x in FY2016 and FY2017, from a relatively steady debt load and EBITDA improvement;

--Positive FCF sustained slightly below the historical margin of 1% in FY2016, with lower FCF generation in FY2017 due to higher capital spending tied to a full year of EWOS. The forecast assumes moderate equity repurchases over the forecast horizon, as well as manageable, tuck-in acquisitions.

RATING SENSITIVITIES

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

Maintenance of the 'A' IDR considers Cargill operating with gross debt leverage (total debt/EBITDA) around the mid-2x range with tolerance for leverage to rise higher for very limited time periods as a result of commodity pricing fluctuations. Presently, Fitch does not expect a significant increase in commodity pricing in the coming year as the currently large stockpiles of most key agricultural commodities provide sufficient cushion from unpredictable external factors such as climate variability, food safety scares, disease outbreaks, and geopolitical issues, to name a few.

Fitch is concerned with Cargill's earnings stagnation in the midst of this presently benign commodity pricing environment, which may lead to negative rating pressure if not reversed. Specifically, EBITDA trending below the FY2015 level as a result of contracting EBITDA margins could result in a revision of the Outlook to Negative, or a downgrade to 'A-' if there is no clear path to operational improvement. Deteriorating performance such that total debt leverage rises and remains in the high 2x range while FCF turns negative over multiple crop cycles, potentially from a commodity price shock, a rating downgrade is likely.

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

An upgrade is not likely in the intermediate term due to historically high gross leverage for the rating category, periodic negative FCF, and earnings and cash flow volatility stemming from significant agricultural supply/demand imbalances.

LIQUIDITY

As with any large commodity processor, ready and sufficient sources of liquidity are necessary for funding working capital requirements that occasionally spike in conjunction with unpredictable pricing movement. Cargill has significant external liquidity with $6 billion in undrawn U.S. and international undrawn credit facilities at Aug. 31, 2015, which backstop its CP programs. The credit facilities comprise a $1.25 billion, 364-day facility expiring October 2016, a $3.75 billion five-year facility maturing in October 2020, and a $1.0 billion 364-day facility in non-U.S. markets expiring in March 2016.

Cargill has consistently generated positive FCF since FY2012 that hovers around a 1% margin, which Fitch expects to sustain in FY2016, albeit at a slightly lower level. The company also had $3.73 billion cash and short-term investments at the end of the first fiscal quarter, which is more than adequate to satisfy nearing long-term debt maturities of $1.7 billion in FY2017 and $900 million in FY2018. However, Fitch believes that the company will likely refinance the nearing maturities given ready access to the capital markets.

FULL LIST OF RATING ACTIONS

Fitch Ratings has affirmed Cargill and its subsidiaries' ratings as follows:

Cargill

--Long-term IDR at 'A';

--Senior unsecured notes at 'A';

--Credit facilities at 'A';

--Short-term IDR at 'F1';

--Commercial paper at 'F1'.

Cargill Ltd.

--Commercial paper at 'F1'.

Cargill Global Funding PLC

--Credit facilities at 'A';

--Commercial paper at 'F1'.

Cargill Asia Pacific Treasury Services Ltd

--Credit facilities at 'A';

--Commercial paper at 'F1'.

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=994440

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=994440

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Contacts

Fitch Ratings
Primary Analyst
Michael Zbinovec
Senior Director
+1-312-368-3164
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Bill Densmore
Senior Director
+1-312-368-3125
or
Committee Chairperson
Megan Neuburger, CFA
Managing Director
+1-212-908-0501
or
Media Relations
Alyssa Castelli, New York, +1-212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Michael Zbinovec
Senior Director
+1-312-368-3164
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Bill Densmore
Senior Director
+1-312-368-3125
or
Committee Chairperson
Megan Neuburger, CFA
Managing Director
+1-212-908-0501
or
Media Relations
Alyssa Castelli, New York, +1-212-908-0540
alyssa.castelli@fitchratings.com