NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned Monsanto Company's (Monsanto) $1 billion senior unsecured term loan a rating of 'A-'. The facility is a delayed-draw term loan allowing access to finance for general corporate purposes while the proposed merger with Bayer AG (Bayer) is pending. The loan will mature upon the earlier of Oct. 28, 2019 and the completion of the merger.
The ratings for Monsanto are on Negative Watch. A full list of ratings follows at the end of this release.
On Sept. 14, 2016 Bayer announced that it had signed a definitive agreement to acquire Monsanto for a revised $66 billion acquisition price including assumed debt. The Negative Watch reflects the potential downgrade of Bayer AG's Issuer-Default Rating (IDR) to below 'A-' as a result of the merger, which would likely result in a subsequent notching down of Monsanto's IDR and debt ratings if its eventual parent is deemed to have strong influence over Monsanto's financial policy.
Fitch's Oct. 4, 2016 press release on Bayer noted that the agency expected to likely downgrade Bayer's 'A' IDR by at least two notches following the completion of the transaction. Should Bayer maintain an IDR of at least 'A-', which Fitch views as unlikely, or if the agency believes that Monsanto would be able to continue to manage to its current financial policies and continue independent public reporting, Fitch could stabilize Monsanto's IDR at its current level.
Should regulatory or other such hurdles derail the deal, Fitch would likely resolve the Negative Watch and assign Monsanto a Stable Rating Outlook, due to Fitch's expectations for continued strong FCF generation over the forecast horizon.
KEY RATING DRIVERS
Offer Details
Bayer's revised offer values Monsanto at $128/share, which represents a 44 percent premium to Monsanto's May 9, 2016 share price. The deal is intended to be financed with a combination of debt and equity that includes a $19 billion equity component Bayer expects to raise through the issuance of mandatory convertible bonds and through a rights issue with subscription rights. Monsanto's shareholders are scheduled to vote on the merger on Dec. 13, 2016 with closing expected by the end of the 2017 calendar year. Bayer currently has in place a fully underwritten $57 billion bridge financing facility to backstop the deal and has committed to pay Monsanto a $2 billion termination fee if the deal falls through.
Strategic Rational of the Transaction
Fitch views the proposed merger as improving Bayer's position in the crop science industry, where the combination will create a leading player. Also, the combination of Monsanto's strength in seeds complements Bayer's strength in crop protection. The transaction would address higher competitive pressure in the rapidly consolidating agricultural supply industry, a process that is being driven by declining crop prices and structurally reducing income generation in the farm sector.
Leading Market Position
Monsanto's rating reflects its substantive market positions in corn, soybean, cotton and vegetable 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.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for Monsanto include:
--Revenue growth at 3% reflecting modest recovery
--EBITDA margins recover gradually to 30% on greater seeds and traits sales and lower relative general and administrative and research and development expenses;
--Capital expenditures of $1.2 billion in FY 2017 and $1.3 billion per year thereafter.
RATING SENSITIVITIES
The Negative Watch could be removed if: the acquisition falls through; Fitch believes that Monsanto would be able to continue to manage to its current financial policies and continue public reporting; or Fitch believes Bayer would control Monsanto's financial profile; and Fitch rates Bayer at 'A-' or above.
The Negative Watch would likely result in a downgrade if: Fitch views the linkage between Bayer and Monsanto as strong and Bayer is downgraded below an 'A-' IDR.
Monsanto's current sensitivities are detailed below:
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, at least $2 billion of which is cash, of less than $3 billion;
--Regulatory actions that threaten Monsanto's business model.
LIQUIDITY
Solid Liquidity: The company maintains high cash balances and high availability under its $3 billion RCF due March 2020. The revolver has a maximum consolidated leverage ratio (substantially total debt/EBITDA) of 3.5x. Estimated maturities of long-term debt over the medium term are: $900 million in FY2017, $300 million in FY2018 and $800 million in FY2019.
Cash and cash equivalents were $1.7 billion, of which $1.6 billion was held by foreign entities as of Aug. 31, 2016. Fitch assumes 35% of the cash at foreign entities is not readily available to repay debt to represent leakage upon repatriation.
Fitch has assigned the following rating:
Monsanto Company
--Senior unsecured term loan due 2019 'A-'.
Fitch's current ratings on the Monsanto Company are as follows:
--Long-Term IDR 'A-';
--Short-Term IDR 'F2';
--Senior unsecured debt 'A-';
--Commercial Paper 'F2'.
The ratings are on Rating Watch Negative.
SUMMARY OF FINANCIAL STATEMENT ADJUSTMENTS
Fitch has made no material adjustments that are not disclosed within the company's public filings.
Additional information is available at 'www.fitchratings.com'.
Date of Relevant Rating Committee: Sept. 14, 2016.
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage - Effective from 17 August 2015 to 27 September 2016 (pub. 17 Aug 2015)
https://www.fitchratings.com/site/re/869362
Short-Term Ratings Criteria for Non-Financial Corporates - Effective Aug. 13, 2015 to Sept. 27, 2016 (pub. 13 Aug 2015)
https://www.fitchratings.com/site/re/869259
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014279
Endorsement Policy
https://www.fitchratings.com/regulatory
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