Fitch Places Archer Daniels Midland's 'A/F1' Ratings on Watch Negative
CHICAGO -- October 22, 2012
Fitch Ratings has placed the ratings of Archer Daniels Midland Company (ADM),
as detailed below, on Rating Watch Negative:
--Long-term Issuer Default Rating (IDR) 'A';
--Senior unsecured debt 'A';
--Convertible notes 'A';
--Credit facilities 'A';
--Short-term IDR 'F1';
--Commercial paper (CP) 'F1'.
The placement on Rating Watch follows ADM's Oct. 19, 2012 indicative,
non-binding proposal to acquire the outstanding shares of GrainCorp at A$11.75
per share in cash, subject to conditions including due diligence, exclusivity
and approval by ADM's Board of Directors. This proposal represents a 33%
premium over GrainCorp's closing stock price on the last business day
preceding the announcement. Based on ADM's proposal, the enterprise value of
the transaction is A$3.3 billion (A$2.7 billion of equity, plus assumed net
debt of approximately A$605 million) or USD 3.4 billion at March 31, 2012. ADM
also acquired a 14.9% economic interest in GrainCorp through equity derivative
contracts. GrainCorp's Board is reviewing the proposal. Fitch will continue to
monitor the negotiations between ADM and GrainCorp and impacts from any
potential additional bidders. The Rating Watch will be resolved when there is
further clarity regarding the transaction, the terms thereof and the pace of
debt reduction following the transaction.
The acquisition of GrainCorp would be complementary to ADM's existing
operations. It would provide ADM with geographic diversification with leading
market positions in Australia. Graincorp would also enhance ADM's export
exposure to Asia. However, financing for the transaction has not been
disclosed, and is likely to lead to substantially higher leverage, at a time
when the company is already facing downward earnings pressure in key business
lines (discussed below).
ADM's credit ratings are supported by its leading position in agricultural
processing and merchandising, as well as its position as a leading player in
bio-energy. The company's competitive advantages include its size, scale and
diversification, along with its extensive vertically integrated origination,
processing and logistics network. ADM's strong liquidity is a key ratings
factor due to the inherent earnings volatility associated with agricultural
markets and the working capital requirement to fund commodity inventories.
Changes in global supply and demand periodically lead to significant swings in
commodity prices and correspondingly, ADM's earnings and cash flow. However,
the company's broad diversification partially mitigates the impact of this
Excluding this potential acquisition, Fitch expects that ADM is likely to
continue to face earnings pressure along with higher working capital usage,
which would result in a weaker credit profile. The U.S. drought accelerated
after ADM's June 30, 2012 fiscal year end, leading to swiftly rising
agricultural commodity prices as prospects for the fall U.S. crops diminished.
High commodity prices and smaller fall 2012 harvests are likely to keep
earnings, primarily in ethanol and Agricultural Services, constrained in the
near term and leverage (not adjusted for readily marketable inventories [RMI])
high for the rating level. Ethanol margins are under pressure, and were
negative for ADM in its fiscal fourth quarter of 2012, as industry supply
continues to exceed demand. Ethanol prices have not kept pace with high corn
prices. Bioproducts, which primarily consists of ethanol, has contributed a
low teens percentage of ADM's segment operating earnings and Agricultural
Services contributed a low 20's percentage on an average annual basis since
The company's free cash flow (FCF; cash flow from operations less capital
expenditures and dividends) for fiscal 2012 was $987 million, a significant
recovery from negative $4 billion in the prior year which was impacted largely
by working capital usage reflecting the impact of higher agricultural
commodity prices on inventories. Fiscal 2012 FCF benefitted from $1 billion in
asset sales through the company's accounts receivable securitization program.
Agricultural prices are expected to be volatile but generally trend upward and
are likely to result in negative FCF for ADM in the near term due to net
working capital increases. Continued volatility in agricultural commodity
prices is likely since ending stocks remain relatively tight and long-term
global demand is growing. Fitch expects commodity prices to remain elevated
until stocks are rebuilt, which will take more than one year given that this
severe drought is the worst in decades. If FCF reverts to negative for longer
than 12 to 18 months, Fitch expects ADM to use additional sources of equity
capital or proceeds from the sale of non-core assets to finance a portion of
its working capital needs. Conversely, if commodity prices recede
significantly, ADM could benefit from reduction in working capital becoming a
greater source of funds.
Fiscal 2012 capital expenditures ramped up again to $1.5 billion, after
moderating somewhat to $1.2 billion in the prior year. ADM plans to reduce
capex slightly in the second half of calendar 2012 to $500 million to $600
million due to near-term high working capital usage. The company also intends
to slow its pace of share buybacks while leverage and working capital usage
are high. Although ADM still plans to buy back the 14 million shares
(approximately $390 million) to offset the remaining dilution from its June
2011 equity unit conversion, Fitch believes ADM would substantially pull back
on share repurchases if this deal is completed. Fitch had previously disclosed
that current ratings factor in Fitch's expectations that ADM be prudent with
its acquisition strategy while unadjusted leverage remains elevated. Fiscal
2012 acquisitions of $241 million were modest and similar to the level in the
prior year period.
ADM's net sales rose 10% to $89 billion during fiscal 2012 versus the prior
year, primarily due to higher average selling prices. Operating earnings fell
24% to $2 billion, driven by significantly weaker ethanol results, as well as
lower grain merchandising, handling, oilseeds crushing and origination.
Operating earnings exclude $437 million impairment, exit and restructuring
charges, primarily consisting of a $349 million impairment on ADM's bio
plastics joint venture.
At June 30, 2012, ADM's cash, cash equivalents and short-term marketable
securities were robust at $1.5 billion and RMI was $7.2 billion after Fitch's
discretionary 10% haircut. RMI is hedged and highly liquid. In addition, ADM
had $4.3 billion of undrawn committed credit facilities that supported its CP
program, against which $1.3 billion of CP was issued. In August 2012, ADM
entered into an additional $2 billion credit facility to support CP
borrowings. The company also has a $1 billion off-balance-sheet accounts
receivable securitization program which terminates on June 28, 2013. The
program was fully utilized at fiscal 2012 year end.
Ample liquidity is expected to support ADM's ratings through periodic earnings
volatility and heightened working capital usage. ADM's total debt with equity
credit was $10.3 billion at June 30, 2012, approximately flat with the
heightened debt level at June 30, 2011. ADM repaid its $1.4 billion floating
rate notes (FRN) that were due Aug. 13, 2012 with funds from short-term
borrowings. The company's next significant long-term debt maturity is $1.15
billion face amount of convertible senior notes due Feb. 15, 2014. None of the
conditions permitting conversion of the notes had been satisfied as of June
In addition to evaluating traditional leverage measures, Fitch's analysis of
agricultural commodity processors takes into consideration leverage ratios
that exclude debt used to finance RMI. Total debt to operating EBITDA,
adjusted for RMI, was 1.1 times (x) for the latest 12 months ended June 30,
2012. On an unadjusted basis, total debt to operating EBITDA was 3.5x.
Unadjusted leverage is high for the rating level, primarily reflecting
earnings weakness in fiscal 2012. Fitch does not include cash dividends
received from unconsolidated affiliates in EBITDA, which would reduce leverage
by approximately 0.1x-0.2x.
WHAT COULD TRIGGER A RATING ACTION
Future developments, that may individually or collectively lead to a negative
rating action include:
Completion of the GrainCorp acquisition on similar terms to the initial
proposal, financed primarily with debt, is likely to lead to a one notch
Separate from this Rating Watch Negative, lack of material improvement from
ADM's recent earnings trends, and debt at current or higher levels, would put
pressure on leverage, particularly gross leverage.
Future developments, that may nonetheless potentially lead to a positive
rating action include:
The ratings could be affirmed, likely with a Negative Outlook, if ADM does not
complete this acquisition.
The Outlook could return to Stable if earnings rebound significantly from
fiscal 2012 and high commodity prices and working capital usage moderate
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
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