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Agrium Swap Risk Rises as It Considers Buying Potash Assets: Canada Credit

The cost to protect Agrium Inc. bonds from default surged on concern that the fertilizer maker may take on more debt to finance the purchase of assets from Potash Corp. of Saskatchewan Inc.

Credit-default swaps on Agrium, North America’s third- largest fertilizer producer by market value, increased 29 basis points to 122.9 basis points in the last 30 days, the biggest gain among the 30 Canadian companies tracked by Bloomberg.

Agrium Chief Executive Officer Michael Wilson said Aug. 17 he would consider buying Potash Corp.’s fertilizer assets that may be spun off after a $40 billion takeover proposed by BHP Billiton Ltd. Agrium may have to borrow money to finance the acquisition, said Charles Neivert, an analyst with Dahlman Rose & Co. in New York.

“People are worried that they might go after some of those assets,” said Neivert, who rates Agrium shares a “hold” and doesn’t own the stock. “That worries credit markets because of the size of the acquisitions.”

Credit default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Elsewhere in credit markets, Bank of Montreal, the nation’s fourth-largest lender, sold C$20 million in three-year step-up notes, with the coupon starting at 2 percent, rising to 2.15 percent in September 2011, and 2.5 percent in September 2012. The bank also sold C$900 million in 3.1 percent notes maturing in March 2016, and $350 million in 4.61 percent bonds due in 2025.

Central Bank Decision

The Bank of Canada raised its benchmark interest rate today and said the country’s recovery will be slower than it had projected because of a weaker outlook for the U.S. economy.

The bank raised its target rate for overnight loans between commercial banks to 1 percent from 0.75 percent, matching estimates from 14 of 20 economists surveyed by Bloomberg. Further increases would need to be “carefully considered” given uncertainty around the outlook, it said today.

The Bank of Canada will release further details of its Sept. 15 auction of two-year bonds tomorrow. The previous two-year auction on Aug. 11 drew an average yield of 1.524 percent and a bid-to-cover ratio of 2.25 times.

The extra yield that investors demand to own corporate bonds rather than government debt widened 1 basis point to 149 basis points yesterday.

Asset Spinoff

Some of the assets spun off from the Potash Corp. transaction may be as large as Agrium’s failed bid for CF Industries Holdings Inc., which was $4.89 billion, Neivert said. Agrium plans to use a combination of the $806 million it had on hand as of June 30 and available credit lines for its acquisition of Australia’s AWB Ltd., which is valued at A$1.2 billion ($1.09 billion).

BHP, the world’s largest miner, has denied speculation it would sell any of Potash Corp.’s assets if the Melbourne-based company’s hostile offer is successful. Potash Corp.’s nitrogen and phosphate fertilizer businesses have been cited by analysts as businesses that may be spun off.

Potash Corp.’s access to low-cost natural gas used in nitrogen production could make those assets attractive, said Jatinder Mall, a credit analyst with Standard & Poor’s in Toronto.

“Potash is pretty good on the nitrogen side,” Mall said. Agrium “tried to grow it in the CF acquisition, so this is kind of the next-best thing,” he said.

Effect on Ratings

Agrium CEO Wilson’s “comment is still fair,” said company spokesman Todd Coakwell. “If the opportunity arises it would be something we would consider.”

S&P hasn’t been approached by Calgary-based Agrium regarding potential acquisitions, Mall said. The effect on ratings would depend on the structure of the transaction and what assets the company is buying. The company is rated BBB with a stable outlook by Standard & Poor’s and Baa2 by Moody’s Investors Service.

The nitrogen business would be “adding something that adds volatility to income and cash flows,” Mall said.

Agrium’s desire to protect its investment-grade credit rating may affect its decision to bid on Potash assets, said Chris Damas, a Barrie, Ontario-based equity analyst at BCMI Research.

Ratings Risk

“I don’t see Agrium buying Potash Corp.’s phosphate if it were offered because it would be too big a chunk of capital to bite off after the AWB deal and would cause the rating on their bonds to deteriorate,” Damas said. “Enough bond traders are worried that the yields, especially on the 2036 issue, are not declining as much as one would expect.”

The 7.125 percent bond maturing in 2036 traded at 122.3 cents on the dollar to yield 5.49 percent on Aug. 26, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. On July 15, the securities traded at 119.4 cents to yield 5.68 percent. The stock has gained 20 percent since then. Fertilizer makers are attractive because of their potential in emerging markets, Dalhman’s Neivert said.

“The vast proportion of growth in fertilizer space in developing countries makes it attractive,” he said. “More people are eating better.”

To contact the reporter on this story: Gene Laverty in Calgary at glaverty@bloomberg.net.

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