Fitch Affirms Archer Daniels Midland's 'A/F1' IDRs; Outlook Stable; Removes
CHICAGO -- December 9, 2013
Fitch Ratings has affirmed Archer Daniels Midland Company's (ADM) ratings as
follows and removed the ratings from Rating Watch Negative:
--Long-term Issuer Default Rating (IDR) at 'A';
--Senior unsecured debt at 'A';
--Convertible notes at 'A';
--Credit facilities at 'A';
--Short-term IDR at 'F1';
--Commercial paper (CP) at 'F1'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
ADM Withdrawal of Graincorp Offer: The rating actions above are in response to
Australia's Federal Treasurer's prohibition of ADM's proposed acquisition of
100% of Graincorp Limited's (Graincorp) shares on national interest grounds.
ADM subsequently withdrew its approximately A$3.4 billion offer to acquire
Graincorp. The Negative Watch formerly assigned to the ratings reflected
uncertainty regarding ADM's capital structure predicated on how the Graincorp
deal was going to be financed. ADM's withdrawal removed this uncertainty. ADM
currently holds a 19.85% equity interest in Graincorp which it must hold until
at least Dec. 31, 2013. After that time ADM may hold, sell or modestly
increase its stake to 24.9%. Fitch expects these actions to be ratings
Significant Current Cash Inflows: Annual FCF averaged approximately $800
million during the past five years. FCF has been volatile, swinging between
positive and negative $3 billion. ADM is currently benefiting from a
substantial inflow from working capital due to moderating commodity prices,
with FCF $5.2 billion for the latest 12 month (LTM) period. As a result, short
term debt to finance working capital has declined significantly. At Sept. 30,
2013 ADM's total debt was $6.9 billion, down from $10.3 billion at June 30,
2012. ADM's potential sale of its cocoa business could provide additional cash
Discretionary Activities Mindful of Ratings: ADM is reviewing its capital
allocation for 2014, including shareholder distribution alternatives. Fitch
believes the company may significantly increase share repurchases, given its
large cash balance and FCF that could have been used for the acquisition.
Fitch believes that bolt-on acquisitions, increasing its equity ownership in
Graincorp as noted above or expanding its relationship with Wilmar
International Limited, a leading agribusiness group in Asia in which ADM has a
16.4% equity interest, are other possibilities. Given ADM's currently high
liquidity, these actions are likely to be accommodated within the current
rating category without an increase in leverage.
Leverage Adequate for Rating Category: 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 highly
liquid. RMI adjusted leverage was 0.7x for the LTM period ending Sept. 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 total debt to EBITDA was 2.4x, FFO adjusted leverage was 1.6x and EBITDA
to gross interest expense was 6.5x for the latest 12 months ended Sept. 30,
2013. Gross leverage is currently adequate for the rating level and has
improved recently on much lower working capital and short term debt. 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.
Corn Ethanol Earnings Volatility is Manageable: Current corn-based ethanol
processing margins are attractive. However, good margins often bring idle
facilities back online, inviting greater competition and chipping away at
margins. The Environmental Protection Agency (EPA) has proposed a cut in the
renewable fuels mandate for 2014 to 13.0 billion gallons, down from the 2014
level set in 2007 at 14.4 billion. If this proposal is enacted in the first
quarter of 2014, it could result in lower demand and margins for ethanol
producers such as ADM, but some of the excess capacity could be taken up by
discretionary blending and increased exports.
Earnings Improvement in 2014: Although there is uncertainty regarding the
magnitude of ADM's ethanol earnings, Fitch expects the company's overall
earnings to improve in 2014 as it processes, transports and merchandises very
large global crops. ADM also expects competitively priced products, strong
U.S. soybean exports and continued good demand for protein to drive its
earnings growth. Given Fitch's expectations for commodity prices to remain
moderate in the near term, in the absence of unforeseen weather events, ADM's
debt should remain in the current range. FCF should turn roughly flat as the
company laps moderate commodity prices.
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.
Abundant Liquidity: ADM's strong liquidity is a key ratings factor due to its
inherent earnings volatility and working capital requirements to fund
commodity inventories. The company had $3.5 billion cash and short term
marketable securities and $6.0 billion of undrawn committed credit facilities
that support its CP program at Sept. 30, 2013. There was no CP outstanding.
The company also has a $1.1 billion off-balance sheet accounts receivable
securitization program which was fully utilized at the most recent quarter
end. The program terminates June 27, 2014 unless extended. Upcoming maturities
of long-term debt primarily consist of $1.15 billion convertible senior notes
due in February 2014. Fitch believes ADM may use cash flow or refinance these
Future developments that may, individually or collectively, lead to a negative
rating action include:
Sustained weak earnings trends, debt financed share repurchases or
acquisitions, resulting in an extended period where total debt/EBITDA is
likely to remain in the high 2x range, could lead to a downgrade. Two
consecutive years of materially 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.
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, +1-312-368-2077
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Grace Barnett, +1-212-908-0718
Wesley E. Moultrie II, CPA, +1-312-368-3186
Brian Bertsch, New York, +1 212-908-0549
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