CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed Archer Daniels Midland Co.'s (ADM) Long-Term Issuer Default Rating (IDR) at 'A'. ADM had approximately $8.5 billion of total outstanding debt at the end of second quarter 2016. The Rating Outlook is Stable.
A full list of ratings follows at the end of this release.
KEY RATING DRIVERS
Global Scale in Agribusiness
ADM is one of the largest global agribusiness firms with leading positions in processing soy beans, wheat, oilseeds, corn, and other agricultural commodities that generated latest-12-month (LTM) revenues of $63 billion. ADM has focused on reducing earnings volatility through asset divestitures or improving existing asset utilization with a current multi-year program to reduce invested capital by $1 billion.
ADM's acquisition of Wild Flavors in 2014 demonstrates ADM's strategy to also increase offerings up the value chain and beyond origination and processing. ADM has an extensive worldwide logistics network and transportation system through its agribusiness segment that is a core competency and provides a competitive advantage with procuring, storing, cleaning and transporting agricultural commodities.
Exposure to Commodity Volatility
ADM, along with other agricultural processors, is subject to variations with commodity pricing, which can be affected by a range of unpredictable macro environmental conditions, including: weather, crop disease outbreaks, and government agricultural policy changes. Thus, ADM can be exposed to periods of volatile agricultural commodity pricing swings stemming from periodic supply/demand imbalances, timing of cash payments or foreign exchange movements that can negatively affect U.S. exports. Consequently, operating earnings can be pressured and/or debt can increase, which can in turn quickly increase leverage. During the past three years, global grain supplies have been replenished from large harvests of key crops, limiting volatility and resulting in lower prices.
RMI Supports Ratings
Agricultural commodity trading and processing companies maintain substantial grain and oilseed inventories that are hedged and could readily be converted into cash to enhance their liquidity and reduce debt. This high level of liquid readily marketable inventories (RMI), when combined with cash and short-term marketable securities, provides substantial financial flexibility during periods of earnings volatility associated with agricultural cycles, partially mitigating financial risk. Commercial paper, accounts receivable securitizations and bank credit facilities are generally used to finance seasonal working capital needs, primarily related to RMI.
For credit purposes, Fitch calculates RMI adjusted leverage by first subtracting the minimum or base level inventory required to operate a downstream processing facility. This inventory is not generally readily available for liquidation purposes with a going concern entity. An additional 10% discount is taken for the remaining merchandisable inventory (reported RMI less minimum base processing inventory) to account for potential basis risk loss on their hedging positions.
Elevated Leverage Expected to Moderate
RMI adjusted leverage (Total debt with equity credit less RMI/EBITDA less RMI interest) increased to approximately 1.9x and gross leverage increased to approximately 3.0x for the LTM period as of June 30, 2016 from approximately 1.1 x and 2.0x in 2015, respectively driven by working capital usage, operating earnings pressure and additional equity investment in Wilmar International Limited, which increased ADM's ownership position from 19% to 22%. The operating earnings decline was due to weakness in U.S. grain handling, limited merchandising opportunities and margin pressure within oilseed crushing and origination during the first half of 2016.
Fitch considers ADM's current RMI adjusted leverage as high for the ratings. However, operating earnings should increase in the second half of 2016 and into 2017 leading to a moderation in leverage back to the mid-1x range or less for RMI adjusted leverage, more in-line with long-term expectations as operating business fundamentals recover. In 2016, this is driven by improvement in agriculture services due to prospects for U.S. exports recovering given the stabilization of the U.S. dollar and the reduced South American crop supply that has been negatively affected by weather along with the lack of grain commercialization by South American farmers. Global protein demand also remains strong with expectations for a healthy U.S. crop harvest.
In 2017, Fitch expects additional earnings growth from organic expansion of the base and cost initiatives/synergies. ADM achieved approximately $150 million of run rate savings in the first half of 2016 driven by operational, process and procurement improvements across the entire business with expectations to achieve $275 million by year-end 2016. A lack of recovery in operating earnings without a corresponding reduction in debt could pressure ratings.
Capital Plan Focused on Shareholders
ADM targets a medium-term capital deployment allocation of 60% to 70% toward strategic bolt-on M&A or return of capital to shareholders and 30% to 40% toward operational capital investment. This is a divergence from past allocation as shareholder returns have taken precedence lately with ADM increasing dividends by 7% and 17%, respectively the past two years to achieve a higher payout ratio, targeting the 30% to 40% range compared to the historical range of 20% to 30%. Share repurchases have also increased as ADM repurchased $2 billion in shares in 2015 and has targeted share repurchases in 2016 within the range of $1.0 billion to $1.5 billion. Through the first half of 2016, ADM had repurchased $487 million shares.
Fitch views the current capital allocation with heavier shareholder returns and capital spending as currently manageable provided cash flow generation increases as expected in 2017. Fitch anticipates ADM would adjust its repurchase strategy in the case of large M&A, unexpected stress on operating earnings or a significantly higher working capital scenario. Currently in 2016, bolt-on M&A has totaled $120 million.
ADM is also undergoing a strategic review of its ethanol dry mill assets, which could result in several alternatives including a joint venture or complete asset divestiture, depending on valuation. Profitability within the ethanol segment has been low given structural challenges as declining crude prices combined with high industry production has pressured industry ethanol margins. Consequently, operating profit in ADM's corn bioproducts segment declined $562 million to $149 million in 2015. Capital expenditures including value-generating projects are expected to total approximately $1 billion in 2016, a moderate decrease from $1.1 billion in 2015.
Key assumptions within Fitch's rating case in 2016 for ADM include:
--EBITDA declining by approximately $200 million to $2.8 billion;
--Capital spending of approximately $1 billion;
--Free cash flow (FCF) moderately negative due to increased working capital requirements;
--Share repurchases of $1.2 billion;
--Modest acquisition activity focused on bolt-on purchases;
--RMI adjusted leverage of approximately 1.7x and gross debt leverage of approximately 2.9x.
In 2017, Fitch's assumptions include:
--EBITDA increasing to the $3.1 billion to $3.2 billion range;
--Capital spending of approximately $1.1 billion;
--Free cash flow (FCF) turns moderately positive;
--RMI adjusted leverage of approximately 1.4x and gross debt leverage of approximately 2.6x.
Fitch's assumption also includes that commodity prices remain relatively stable over the forecast period.
Future developments that may individually or collectively, lead to a negative rating action:
--RMI adjusted leverage sustained above mid 1x range driven by EBITDA compression and/or a meaningfully higher debt levels most likely from changing macro environmental conditions or increase in working capital;
--Gross leverage sustained above 3x;
--A material increase in leverage from a significant debt financed acquisition, with lack of meaningful deleverage that returns RMI adjusted leverage to below the mid 1x range 24 months post transaction.
--Change in financial policy;
--Lack of FCF generation lasting over two years.
Given the inherent earnings volatility within the business, the significant periodic supply/demand imbalances, and where ADM is expected to manage its capital structure, Fitch views a positive rating action as unlikely over the intermediate term.
Future developments that could, individually or collectively, lead to a positive rating action include:
--RMI adjusted leverage sustained below 1.0x;
--Gross leverage sustained below 2.5x;
--Optimization of core operations by improving asset utilization and shifting operating portfolio into less volatile, higher margin assets.
ADM has abundant sources of external liquidity for use in financing its operations worldwide. The company maintains revolving credit agreements totaling $4 billion to provide short-term funding across the globe, comprising two $1.5 billion five-year agreements due in December 2020 and October 2020 along with a $1 billion 364-day facility expiring in December 2016. The facilities act as a backstop to a $4 billion U.S. commercial paper program. ADM had outstanding CP borrowings of $1.4 billion at the end of the second quarter 2016. Cash, cash equivalents, and short-term marketable securities were approximately $700 million. Maturities remain manageable with $261 million due in 2017 and $560 million due in 2018.
In addition, ADM has domestic and European accounts receivable securitization programs. The securitization programs provide ADM with up to $1.5 billion in funding against the transferred accounts receivables. As of June 30, 2016, ADM utilized $1.1 billion of its facility under the programs. Finally, Fitch sees additional support to ADM's already strong liquidity from RMI (company reported) of agricultural commodities including corn, soybeans, and oilseeds, which totaled $5.2 billion on June 30, 2016.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
Archer Daniels Midland Co.
--Long-Term IDR at 'A';
--Senior unsecured bank facility at 'A';
--Senior unsecured notes at 'A';
--Short-Term IDR at 'F1';
--Commercial Paper Rating at 'F1'.
Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below:
--Financial statement adjustments for adding back off-balance sheet receivables securitization.
--Cash distribution ($340 million in 2015) received from affiliates is reflected in leverage metrics;
--Reported RMI is reduced by determining the base level of processing RMI required that supports ADM's processing facilities along with a discretionary 10% of the remaining RMI to determine adjusted RMI available for credit purposes.
Additional information is available at 'www.fitchratings.com'.
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
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