Fitch Affirms ADM's 'A' IDR; Outlook Stable
CHICAGO -- July 8, 2014
Fitch Ratings has affirmed Archer Daniels Midland Co.'s (ADM) Issuer Default
Rating(IDR) at 'A'. The ratings apply to approximately $5.8 billion of total
outstanding debt. The Rating Outlook is Stable.
A full list of ratings follows at the end of this release.
KEY RATING DRIVERS
--The acquisition of Wild Flavors GmbH (Wild Flavors), a developer and
marketer of natural flavorings and ingredients, is consistent with the
company's strategy to partially offset the inherent volatility of its
agricultural commodity businesses with higher growth, higher margin
--Unadjusted debt leverage will increase modestly by the end of 2014 in
conjunction with financing necessary to complete the largest acquisition in
ADM's history. ADM had sufficient financial flexibility following the full
repayment of $1.15 billion in convertible notes in February. Fitch sees ADM's
unadjusted leverage rising, but staying below 2.5 times (x) at the end of the
year, a level commensurate with the 'A' rating category.
--ADM has generated strong free cash flow (FCF) over the past year benefiting
from a moderation in agricultural commodity pricing from highs experienced due
to severe drought in 2012. Pricing conditions during 2014 may remain favorable
for ADM given anticipated bumper harvests.
--ADM remains committed to a shareholder policy that increased the dividend by
26% this year and calls for repurchasing 18 million common shares, which Fitch
estimates at approximately $800 million, by the end of 2014.
Wild Flavors Purchase Consistent with Business Strategy
Yesterday, ADM announced plans to acquire Wild Flavors, a developer of natural
flavorings, for EUR2.3 billion (approximately $3.1 billion, or approximately
14x EBITDA). The purchase conforms to ADM's strategy to expand its value-added
offerings to partially offset volatility of the agricultural commodity
businesses. Wild Flavors' revenues may reach EUR1.0 billion this year with
EBITDA margin in the mid-teens. The new business also brings a product
portfolio of natural food and beverage flavorings and ingredients that are
sold to more than 3,000 customers in over 130 countries. Wild Flavors also has
deep research and production expertise with 28 research facilities and 16
manufacturing plants across the world.
ADM and Wild Flavors' businesses are complementary, both geographically and
product wise, with little overlap between the two entities. As such, no
regulatory approval problems akin to the GrainCorp purchase are anticipated
among the eight jurisdictions that will need to review the transaction. ADM
expects the acquisition to close at the end of the third quarter or in the
fourth quarter of 2014. Following the completion of the acquisition, ADM will
combine its existing specialty ingredients with Wild Flavors under a new
business segment that will have sales in the range of $2.5 billion and provide
consumer product developers with offerings to assist in texture, formation,
nutrition and taste of their products. ADM targets EUR100 million of
synergies, two-thirds revenue and one-third cost, by the third year after the
close of the acquisition.
Modest Leverage Increase
Fitch estimates that a combination of cash flow and short-dated floating rate
debt will finance the purchase of Wild Flavors, the largest asset purchase in
ADM's history. ADM has sufficient financial flexibility demonstrated by a
presently strong balance sheet after the company paid down the maturing $1.15
billion of convertible senior notes in February 2014. Gross debt leverage that
stood at 1.9x for the LTM as of March 31, 2014 will modestly rise but stay
below 2.5x at the end of 2014, a level commensurate with the current rating
Strong cash flow supported by stable commodity pricing during the year could
aid in rapid debt reduction following completion of the transaction. Moreover,
ADM is cutting capital spending to $900 million in 2014 from $1.2 billion
previously, to preserve cash and potentially accelerate debt repayment. By the
end of fiscal 2015, Fitch sees gross leverage below 2.0x. ADM benefits from a
favorable debt maturity schedule as the company will need to address $300
million in 8.375% unsecured notes maturing in April 2017.
Fitch also considers readily marketable inventory (RMI) in the evaluation of
credit measures utilizing a 10% discretionary reduction to ADM's reported RMI.
In the RMI-adjusted debt leverage calculation, Fitch excludes incremental debt
utilized to fund the RMI and reduces EBITDA by the amount of interest on the
debt used to finance RMI (i.e RMI interest is reclassified to costs of goods
sold). Similarly, interest expense on debt used to finance RMI is excluded
from EBITDA and interest expense in the calculation of EBITDA-to-interest
coverage ratios. Using the adjustments, RMI-adjusted debt leverage was 0.2x
and RMI-adjusted interest coverage was 19.5x for full year 2013, respectively.
Stable Commodity Pricing Benefiting Cash Flow
ADM along with other agricultural processors are subject to variation of
commodity pricing affected by a range of unpredictable macro environmental
conditions, including weather, animal disease outbreaks, and government
agricultural policy changes. Currently, agricultural commodity pricing has
moderated from highs experienced due to severe drought in 2012 following
record harvests during 2013 and expectations of another good crop year in
2014. As such, free cash flow (FCF, operating cash flow less dividends and
capital spending) rose to $3.1 billion and $3.8 billion in the LTM ending
March 31, 2014 and in fiscal 2013, respectively, from $631 million for fiscal
2012. Fitch sees solid FCF continuing in 2014, including a higher dividend and
a moderation in capital spending, supported by a beneficial pricing
environment throughout the year.
Extensive External Liquidity Available
ADM had $6.9 billion in lines of credit, of which $6.6 billion was unused at
the end of the first quarter. A total of $4.0 billion of these lines of credit
backstop the company's commercial paper borrowing facility, which was unused
as of March 31, 2014. ADM also has accounts receivable securitization programs
that can provide up to $1.5 billion in additional funding. Fitch sees
additional support to ADM's strong liquidity from RMI of agricultural
commodities including corn, soybeans, and oilseeds that totaled $7.7 billion
on March 31, 2014. RMI is very liquid given widely available markets and
international pricing mechanisms. Balance sheet cash and short-term
investments were approximately $1.5 billion on March 31, 2014.
Future developments that may individually or collectively, lead to a negative
--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
--Sustained lack of FCF generation lasting over two crop seasons;
--A material increase in leverage from a significant debt financed
transaction, most likely another 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
Fitch affirms ADM's rating as follows:
--Long-term IDR at 'A';
--Senior unsecured bank facility at 'A';
--Senior unsecured notes at 'A';
--Short-term IDR at 'F1';
--Commercial paper rating at 'F1'
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
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Fitch Ratings, Inc.
70 W. Madison St.
Chicago, IL 60602
Judi Rossetti, CFA, CPA
Brian Bertsch, New York, +1 212-908-0549
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