Fitch Downgrades Monsanto's IDRs to 'A-/F2'; Outlook Stable
NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded the Long-term Issuer Default Rating (IDR), revolving credit facility rating and senior unsecured note ratings of Monsanto Company (Monsanto) to 'A-' from 'A+'. Fitch has downgraded Monsanto's Short-term IDR and commercial paper rating to 'F2' from 'F1'. The downgrade follows from the company's announcement of a new two year $10 billion share repurchase authorization, including $6 billion accelerated repurchase program and target Net-Debt-to-EBITDA ratio of 1.5 by end of fiscal year 2015. The Rating Outlook is Stable. A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
The ratings reflect Monsanto's substantive market positions in corn, soybean, cotton and vegetables seeds and traits; leading or sizeable positions depending on crop and geography. The company has R&D-driven expertise in plant biotechnology 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 credit profile is strong, marked by robust operating margins, significant free cash flow, moderate leverage and solid liquidity. The company generated $4.7 billion of operating EBITDA in the LTM period ended May 31, 2014, corresponding to 30% of net sales. Over the same period, free cash flow after dividends but before acquisitions was approximately $0.9 billion. Total Debt to EBITDA for the period was 0.7x. Fitch expects financial leverage to increase with the recapitalization but for total debt/EBITDA to remain at or below 2x.
Fitch expects Monsanto to continue to generate substantial positive free cash flow in most fiscal years and to maintain a strong credit profile appropriate for an R&D-driven company.
Monsanto's operating profits are driven by its corn seeds and traits which accounted for over half of the company's gross profits again in fiscal 2013. Farm economics are very healthy, which enables more farmers to buy newer generation seeds and traits. Corn planting in the U.S. may be lower in 2014 than in 2013 due to lower corn prices, but Fitch expects Monsanto's corn seeds and traits gross profits to grow due to U.S. farmer demand for new seeds and traits and growing hybrid corn planting in South America.
The rating is somewhat constrained by the company's growth-through-acquisition strategy and its sizeable dividends and share buyback program. Since 2007, Monsanto completed multiple acquisitions for an aggregated amount of roughly $4 billion, including the acquisition of The Climate Corp., to broaden its product portfolio into cotton, vegetables and other seeds, expand its geographical footprint and enhance service offerings to farmers. Fitch expects Monsanto to balance its new repurchase program with investment opportunities to retain its target capital structure.
The Stable Outlook is based on robust operating performance and expectations for continued sales and earnings growth. In year to May 31, 2014, sales grew 4.5% year over year to approximately $13.2 billion and operating EBITDA increased 9.2% to $4.8 billion compared to the first three quarters of 2013, accounting for 36% of sales.
Fitch notes that the May quarter is the seasonal working capital high/cash low quarter. The company's liquidity totaled approximately $3.8 billion at May 31, 2014 with available cash at $1.8 billion and full availability under the company's $2 billion revolving credit facility due April 2016. The facility has a total debt to total capital covenant of less than 66 2/3% and Fitch expects the company to remain in compliance. Estimated maturities of debt over the five years are $300 million in FY 2016, $400 million in FY 2017, $300 million in FY 2018 and 300 million in FY 2019. Fitch expects the bulk of debt issued to finance the share repurchases to be longer term and graduated.
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 downgrades Monsanto's ratings as follows:
--Long-term IDR to 'A-' from 'A+';
--Senior unsecured revolving credit facility to 'A-' from 'A+';
--Senior unsecured debt to 'A-' from 'A+';
--Short-term IDR to 'F2' from 'F1';
--Commercial Paper to 'F2' from 'F1'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 2014);
--'Rating Chemical Companies' (August 2012);
--'North American Chemicals 2014 Outlook' (December 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Rating Chemical Companies