CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed Archer Daniels Midland Co.'s (ADM) Issuer Default Rating (IDR) at 'A'. The ratings apply to approximately $5.7 billion of total outstanding debt. The Rating Outlook is Stable.
See a full list of ratings at the end of this release.
KEY RATING DRIVERS
--EBITDA margin increased significantly to 4.8% in 2014 from 3.4% in 2013 concomitant with a 27% increase in EBITDA as ADM successfully executed upon its operating strategy. Fitch sees EBITDA margin expanding to more than 5.0% in 2015 with continuation of the current commodity-pricing environment backstopped by consecutive bumper harvests in South America and North America, integration of Wild Flavors and Specialty Commodities, and sustained cost reduction efforts.
--Gross leverage dropped to 1.46x in 2014 from 2.23x in 2013 as ADM repaid maturing convertible notes early in the year. ADM demonstrated financial discipline during 2014 with the use of cash on hand and forgoing long-term borrowings to fund heavy business development. Fitch sees relatively steady leverage at the present level over the next two years given no long-term debt maturities until 2017, and Fitch's expectations that EBITDA will continue to improve.
--Shareholder returns may take precedence in ADM's typically balanced capital plan this year given a 17% increase in dividends and a publicly stated target of share repurchases in the range of $1.5 billion to $2 billion. Fitch sees the heavier shareholder returns as well as increased capital spending as manageable within expected cash flow generation, coupled with expected proceeds from near-term business divestments.
--ADM has significant sources of internal and external liquidity, arising from free cash flow (FCF) of $3.4 billion in 2014 as well as access to $6.6 billion in unused lines of credit at Dec. 31, 2014. The company has no debt due over the next two years with the next long-term debt maturities being $300 million and $700 million maturing in 2017 and 2018, respectively.
Profitability Increasing: EBITDA grew almost 27% in 2014 to $3.9 billion as ADM executes upon its operational strategy, which calls for, to name a few, improved returns via cost reduction, capital discipline, and portfolio optimization. Accordingly, EBITDA margin expanded to 4.8% in 2014 from 3.4% in the prior year with achievement of more than $400 million in cost savings coupled with divestment of the non-core South American fertilizer business and intention to sell its underperforming cocoa and chocolate businesses. Fitch sees EBITDA margin expanding to more than 5.0% in 2015 with continuation of the current commodity-pricing environment backstopped by consecutive bumper harvests in South America and North America. In addition, annualization of the recently acquired value-added ingredients businesses, Wild Flavors and Specialty Commodities, and continued cost initiatives of $550 million over the next five years further support margin expansion in the absence of commodity price spikes.
Leverage Improvement: Gross leverage dropped to 1.46x at the end of 2014 from 2.23x in 2013 with the payment of convertible notes early in the year. ADM demonstrated financial discipline during 2014 with the use of cash on hand and forgoing long-term borrowings to fund heavy business development, notably the $3.3 billion acquisition of Wild Flavors in December. Fitch sees relatively steady leverage over the next two years given no long-term debt maturities until 2017, and Fitch's expectations that EBITDA will continue to improve in the current commodity pricing environment. The expected leverage measure is below Fitch's comfort level in the 2.0x to 2.5x range; however, ADM remains vulnerable to often volatile agricultural commodity pricing swings stemming from periodic supply/demand imbalances that may quickly revert leverage to within the range.
Abundant Harvests Sustain Lower Pricing: ADM, along with other agricultural processors, is subject to variation in commodity pricing affected by a range of unpredictable macro-environmental conditions, including weather, crop disease outbreaks, and government agricultural policy changes. Agricultural commodity pricing has moderated from highs experienced in 2012 due to severe drought, as seed and grain supplies have increased following consecutive record harvests in 2013 and 2014. With less strain on working capital, FCF increased significantly to $3.8 billion and $3.4 billion in 2013 and in 2014, respectively, from $631 million for fiscal 2012. Fitch sees adequate FCF, averaging a historical margin of around 1%, continuing over the next two years, that incorporates the higher dividend and an increase in capital spending, supported by a beneficial pricing environment.
Balanced Capital Plan: Fitch sees capital deployment balanced between capital spending and shareholder-friendly activities during 2015. Shareholder returns may take precedence this year as ADM increased dividends by 17% to achieve a higher payout ratio, and declared a target of share repurchases in the range of $1.5 billion to $2 billion. Capital expenditure including value-generating projects will also rise to between $1.1 billion and $1.3 billion in 2015 to help drive ADM's operational strategy. These amounts compare to share repurchases of $1.1 billion and capital spending of $894 million in 2014, when ADM devoted the majority of its capital to acquisitions. Fitch sees the heavier shareholder returns and capital spending as manageable within expected cash flow generation, and expected proceeds from the near-term divestment of the company's cocoa and chocolate businesses. However, Fitch is concerned about rising dividends in light of inherently volatile cash flow linked to uncertainties surrounding commodity pricing. However, a significant increase in contributions from less susceptible value-added businesses may offset this risk in the long term.
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 hedged and very liquid. Including Fitch's discretionary 10% haircut to reported RMI, RMI adjusted leverage was 0.1x for fiscal 2014. Since RMI adjusted metrics are generally strong for the rating level at around 1.0x or below even when the company has stressed operating earnings and cash flow, Fitch places more emphasis on gross leverage.
Future developments that may individually or collectively, lead to a negative rating action:
--Fitch is comfortable with ADM operating with gross debt leverage in the range of 2.0x to 2.5x. However, rating pressure will arise if EBITDA compression and/or a higher debt load leads to sustained unadjusted leverage exceeding 2.5x;
--Sustained lack of FCF generation lasting over two annual crop seasons;
--A material increase in leverage from a significant debt-financed transaction, most likely a large acquisition.
Fitch sees a positive rating action as unlikely over the intermediate term given ADM's historically high gross debt leverage for the rating category, periodic negative FCF, and vulnerability to significant periodic supply/demand imbalances.
Key assumptions within Fitch's rating case for ADM include:
--EBITDA margins increasing to more than 5% over the next two years in a steady-state low pricing environment;
--Gross debt leverage remaining consistent with current levels supported by no long-term debt maturities in 2015 and 2016 and Fitch's expectation for EBITDA improvement;
--Capital spending increasing to a more traditional amount though 2016 after successive years of capital discipline in 2013 and 2014;
--FCF margin around historical levels incorporating a growing dividend and heavier capital spending;
--Share repurchases at the top-end of the publicly stated range in 2015;
--Modest acquisition activity focused on manageable, tuck-in purchases.
Fitch affirms ADM's ratings as follows:
--Long-term IDR at 'A';
--Senior unsecured bank facility at 'A';
--Senior unsecured notes at 'A';
--Short-term IDR at 'F-1';
--Commercial paper at 'F-1'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014);
--'Commodity Processing and Trading Companies Ratings Navigator Companion Report' (Feb. 3, 2015).
Applicable Criteria and Related Research:
Commodity Processing and Trading Companies: Ratings Navigator Companion
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage