Fitch Affirms Monsanto's IDRs at 'A+/F1'; Outlook Stable
CHICAGO -- June 12, 2013
Fitch Ratings has affirmed the long-term Issuer Default Rating (IDR),
revolving credit facility rating and senior unsecured note ratings of Monsanto
Company (Monsanto) at 'A+'. Fitch has also affirmed Monsanto's short-term IDR
and commercial paper rating at 'F1'. The Rating Outlook is Stable. See the
full list of rating actions 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 margin 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
Monsanto's credit profile is strong. The company generated $4.4 billion of
operating EBITDA in the latest 12 months (LTM) to Feb. 28, 2013, corresponding
to 30% of net sales. LTM free cash flow was approximately $1.8 billion. Gross
balance sheet debt-to-EBITDA leverage stood at 0.5x. Net debt was negative
$2.2 billion including $4.4 billion of cash and cash equivalents and $310
million of short-term marketable securities.
Monsanto's operating profits are driven by its corn seeds and traits which
accounted for over half of the company's gross profits in fiscal 2012. With
corn prices well above historical averages, farmers are planning to plant a
record number of acres of corn, according to the USDA, which requires greater
volume of seeds. Higher corn prices are also improving farm economics, which
enables more farmers to buy newer generation seed and traits. These are higher
margin sales for Monsanto which is evident as the company's margins have been
Fitch believes the company's litigation risk has decreased recently. In May,
the U.S. Supreme Court ruled unanimously for the company in the Bowman case.
Where U.S. patent law is emulated around the world, this decision will prompt
other jurisdictions to similarly uphold trait patents. Fitch also believes
that cases brought by Monsanto will be quicker to litigate as a function of
this decision. This could eventually translate into litigation cost savings.
In March, Monsanto settled its countering legal claims with E.I. DuPont de
Nemours and Company (DuPont). DuPont will be given relief from a $1 billion
jury verdict finding they violated a contract with Monsanto that prohibited
the stacking of Monsanto's RoundUp Ready trait with another glyphosate
resistant trait. In turn, DuPont will drop its antitrust claims against
Monsanto. Additionally, Monsanto and DuPont entered into a cross-licensing
agreement, granting each other access to various patented traits. The finding
of RoundUp Ready wheat in Oregon this year may expose the company to damage
claims but the investigation into the source of the glyphosate resistant wheat
is ongoing. Monsanto ended its field trials of RoundUp Ready wheat in 2005.
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
$3 billion to broaden its product portfolio into cotton, vegetables and other
seeds and to expand its geographical footprint.
Shareholder-friendly actions included $722 million dividends paid in the LTM
period ended Feb. 28, 2013. Dividends have been growing quickly and are
expected to continue to grow. The company's board approved a 25% increase in
the dividend per share in August 2012. The company's reported $259 million of
share buybacks net of proceeds from stock option exercises LTM to Feb 28, 2013
is not large but are expected to grow. The Board of Directors recently
approved a new $2 billion three-year share repurchase program to commence July
1, 2013. Monsanto has an existing $1 billion program started in January 2013
(authorized in June 2012, effective July 1, 2012).
The Stable Outlook is based on robust operating performance and expectations
for continued sales and earnings growth. In the first half of the company's
fiscal 2013, sales grew 17% to approximately $8.4 billion and gross profits
increased to $4.5 billion or 53% of sales.
The company's liquidity totaled approximately $6.8 billion at Feb. 28, 2013,
based on the company's undrawn $2 billion revolving credit facility, cash and
cash equivalents and short-term marketable securities. Monsanto's facility
expires in April 2016 and requires the company to maintain a total debt to
total capital ratio of less than 66 2/3%. Monsanto has significant headroom
under the covenant as Fitch calculates the company's total debt-to-total
capital is 14% at Feb. 28, 2013. Monsanto's next maturity is $300 million of 2
3/4% notes due 2016, making their maturity schedule very manageable.
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.
Positive: Future developments that may, individually or collectively, lead to
positive rating action include:
--Meaningful product diversification beyond seeds and traits and agricultural
--Substantially increased earnings contribution from outside North America.
Negative: Future developments that may, individually or collectively, lead to
negative rating action include:
--Significant deterioration of credit metrics following potential sizeable
--Substantial dividends or share buyback payouts that are debt-financed;
--Regulatory actions that threaten Monsanto's business model.
Fitch affirms Monsanto's ratings as follows:
--Long-term IDR at 'A+';
--Senior unsecured revolving credit facility at 'A+';
--Senior unsecured debt at 'A+';
--Short-term IDR at 'F1';
--Commercial Paper at 'F1'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Rating Chemical Companies' (Aug. 9, 2012).
Applicable Criteria and Related Research:
Rating Chemical Companies
Corporate Rating Methodology
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Christopher M. Collins, CFA
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
Monica M. Bonar
Sean T. Sexton, CFA
Brian Bertsch, New York, +1 212-908-0549
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