Fitch Maintains Rating Watch Negative on Archer Daniels Midland's 'A/F1'
CHICAGO -- October 22, 2013
Fitch Ratings maintains the following ratings for Archer Daniels Midland
Company (ADM) 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'.
KEY RATING DRIVERS
Rating Watch Negative Continues: The Negative Watch was initially placed on
Oct. 22, 2012, following ADM's public disclosure that the company held a 14.9%
economic interest in GrainCorp Limited (GrainCorp) shares. ADM increased its
common equity interest in GrainCorp to 19.8% prior to the company's May 2013
cash offer to acquire the outstanding GrainCorp shares for A$12.20 per share.
The aggregate transaction value is about A$3.4 billion including assumed debt.
The acquisition was valued at approximately 8.5x EBITDA, excluding ADM's
estimate of A$50 - 70 million run rate synergies by the end of year two. As
part of the acquisition terms, GrainCorp will pay its shareholders an $1.00
dividend, plus an additional 3.5 cents per month beginning Oct. 1, 2013.
GrainCorp's board has unanimously recommended ADM's offer. As of Aug. 7, 2013,
the company had received acceptance of its offer by approximately 5% of
ADM plans to fund the acquisition with a combination of operating cash flow
and debt. The Negative Watch will be resolved when the transaction gains more
certainty of closing, including approvals from regulators in China and the
Foreign Investment Review Board (FIRB) in Australia, and details regarding
financing plans are disclosed. FIRB is expected to make its decision by Dec.
17, 2013. ADM's offer is subject to conditions, including ADM receiving a
minimum acceptance of 50.1% of GrainCorp shares.
GrainCorp is Complementary: Graincorp is a leading Australian grain handler
and oilseeds processor. The acquisition of GrainCorp would be complementary to
ADM's existing operations. It would provide ADM with geographic
diversification and leading market positions in Australia. GrainCorp would
also enhance ADM's export exposure to key growth regions in the Middle East,
Africa and Asia, particularly China. Global demand for agricultural products
is growing significantly, as rising incomes support higher consumption of
Cocoa and Working Capital Inflows: ADM is currently benefiting from an inflow
of funds from working capital due to moderating commodity prices supported by
expectations for very large fall North American crops. Therefore, the need for
high levels of debt financing for the acquisition has decreased significantly
from the year ago period of very high commodity prices and working capital
usage. Also, the company is considering the sale of its recently
underperforming cocoa business, which Fitch estimates could generate more than
$1.0 billion in proceeds. If ADM utilized those or other asset sale proceeds
($450 million Gruma proceeds were already used), along with operating cash
flow, little if any incremental debt could be necessary to fund the
FCF Volatile, Currently Positive: FCF for the six months ending June 30, 2013
was $1.7 billion, a significant recovery from negative $1.0 billion in the
prior-year period. Inventories declined by about $2.0 billion year over year,
due to both lower quantities and lower prices. Lower quantities were impacted
both by the 2012 drought and the company's inventory management. Although
annual FCF averaged approximately $800 million during the past five years, it
has swung between positive and negative $3 billion. 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 noncore asset sales to finance a portion of
its working capital.
Abundant Liquidity: ADM has $6.0 billion of undrawn committed credit
facilities that support its CP program, against which $150 million of CP was
outstanding at June 30, 2013. The company also has a $1 billion off-balance
sheet accounts receivable securitization program which was fully utilized at
June 30, 2013. The program terminates June 27, 2014 but could be extended.
Upcoming maturities of long-term debt primarily consist of $1.15 billion
convertible senior notes due in February 2014, which ADM could currently pay
off with cash flow or refinance.
Earnings Improvement in 2014: Segment operating profit decreased 13% to $1.3
billion for the six months ended June 30, 2013 versus the prior year period,
on lower Oilseeds and Agricultural Services profits, partially offset by
higher earnings in Corn Processing. Following the drought-reduced 2012 North
American harvest, crop supplies were tight and led to lower North American
export opportunities and high crop prices. Fitch expects ADM's earnings to
improve in late 2013 and 2014 when the company can process and transport the
very large fall 2013 North America crops.
Size, Scale, and Diversification: ADM's credit ratings are supported by its
leading positions in agricultural processing and merchandising, as well as its
status 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 its inherent earnings
volatility and working capital requirements to fund commodity inventories.
RMI Adjusted Leverage Metrics: Total debt to EBITDA was 3.0x for the latest 12
months ended June 30, 2013, operating EBITDA to gross interest expense was
5.7x and FFO adjusted leverage was 3.2x. In addition to evaluating traditional
leverage measures, Fitch's analysis of agricultural commodity processors also
considers leverage ratios that exclude debt used to finance readily marketable
inventory (RMI). RMI is hedged and highly liquid. RMI adjusted leverage was
0.5x for the LTM period ending June 30, 2013. Fitch takes a discretionary 10%
haircut to reported RMI. Since RMI adjusted metrics are generally strong for
the rating level even when the company has stress on its operations and cash
flow, Fitch places more emphasis on gross leverage.
Gross leverage remains high for the rating level, primarily reflecting 2012
drought related earnings weakness. Fitch does not include earnings received
from unconsolidated affiliates in EBITDA. If Fitch had included cash dividends
received, this would reduce leverage by approximately 0.1x - 0.2x.
Future developments that may, individually or collectively, lead to a negative
rating action include:
Completion of the A$3.4 billion Graincorp transaction on a substantially debt
financed basis is likely to lead to a one notch downgrade. Sustained weak
earnings trends, resulting in an extended period where total debt/EBITDA is
likely to remain greater than 2.5x, could also lead to a downgrade. Two
consecutive years of negative FCF would also support a downgrade.
Future developments that may, individually or collectively, lead to a positive
rating action include:
An upgrade is not anticipated due to the company's historically high gross
leverage for the rating level, periodic negative FCF and vulnerability to
significant periodic supply/demand imbalances. The ratings may be affirmed
with a stable outlook if the Graincorp transaction is completed with
substantial asset sale proceeds and/or FCF, or the acquisition is not
completed, so that gross leverage at 2.5x or lower is sustainable.
Prospects for a sustainable period of moderate commodity prices and working
capital, as well as lower debt levels, would also support affirming the
ratings with a stable outlook.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Effective from 8 August 2012 - 5 August 2013
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Judi M. Rossetti, CPA/CFA
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Wesley E. Moultrie II, CPA
Brian Bertsch, +1-212-908-0549 (New York)
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