Fitch assigns A rating to Cargill's proposed senior unsecured notes; outlook negative

CHICAGO , March 19, 2012 (press release) – Fitch Ratings has assigned an 'A' rating to Cargill Incorporated's (Cargill) proposed senior unsecured notes. The Rating Outlook is Negative. A complete list of the ratings for Cargill and its subsidiaries is at the end of this press release.

Fitch anticipates that Cargill will use the net proceeds from this issuance for general corporate purposes, including the repayment of debt at maturity. The new notes will be issued under Cargill's indenture dated Oct. 1, 1995, as amended. This indenture does not contain financial covenants but does place restrictions on liens and sale/leasebacks.

Cargill's ratings reflect its competitive position as the largest agricultural company based in the United States and one of the largest privately owned companies in the world. Its operations span every major country and almost every agricultural commodity. Key agricultural operations include oilseed processing, corn milling, meat processing and animal nutrition. The ratings incorporate Cargill's extensive geographic and product line diversification, which generally lessens operating earnings volatility associated with the agricultural sector but recently has not provided significant benefit. The ratings also factor in Cargill's strong liquidity, which is enhanced by readily marketable inventory (RMI).

Cargill's credit strengths are balanced against the company's earnings volatility. The company is susceptible to periodic negative free cash flow when commodity prices rise and working capital increases accordingly, which occurred in fiscal 2011. The use of working capital has moderated and free cash flow turned positive for the latest 12-month (LTM) period ending Nov. 30, 2011, reflecting a period of downward pressure on commodity prices. Recent spot prices for key agricultural commodities are down year over year, but there has been significant price volatility, and some recent upward pricing pressure has emerged on weather-related crop concerns in South America.

The Negative Outlook reflects that Cargill has generated very weak earnings the past two quarters, which, combined with the absence of Cargill's substantial equity stake in The Mosaic Company (Mosaic), has resulted in a weaker credit profile and a material increase in leverage that puts pressure on the ratings. In May 2011, Cargill divested its nearly $19 billion equity stake in Mosaic, which had provided Cargill with a significant source of public equity, contributed material earnings and provided support to the ratings during previous periods of low earnings. Cargill retained approximately $7 billion of the Mosaic proceeds, and Fitch estimates that the company used roughly 70% of that amount for short-term debt reduction. Cargill also engaged in a substantial amount of acquisitions recently, the largest being the $2.1 billion acquisition of Provimi, a global animal nutrition provider. The acquisitions were funded primarily with a portion of the Mosaic proceeds, cash and other divestiture proceeds.

Cargill generated record high earnings from continuing operations in fiscal 2011, but earnings faltered in the first half of fiscal 2012. Fiscal 2011 net earnings from continuing operations rose 35% from the prior year to $2.7 billion. Earnings for the year rose in four out of five of Cargill's business segments, particularly as a result of its global sourcing and risk management capabilities in Origination and Processing. Cargill had a rough first half of fiscal 2012 with a 78% drop in net earnings from continuing operations to $336 million, versus strong earnings in the prior year. Lower earnings were driven by multiple factors, including weaker animal protein results primarily due to higher livestock and feed costs, commodity and financial markets driven by political uncertainties rather than fundamentals, and weakness in Cargill's sugar business. Fitch believes that some of these factors could linger and hinder a recovery in Cargill's earnings.

Cargill's operating performance during the remainder of fiscal 2012 and earnings expectations for fiscal 2013 will be important factors in determining whether the company has an appropriate level of debt for the current rating level. If earnings weakness continues without materially lower debt levels, it could lead to a negative rating action. Cargill's debt maturities are concentrated in the next two years when more than $3 billion matures. Fitch currently expects that Cargill will refinance those maturities but would view debt reduction positively. Although not anticipated, a negative rating action could also occur if Cargill's recent acquisition pace continues and results in higher leverage. Fitch is likely to revise Cargill's Outlook to Stable if the company can generate sustainable improvement in earnings or material debt reduction.

Fitch's ratings for agribusiness processors focus predominantly on results over several reporting periods and the industry outlook in the near-to-medium term. Quarter-to-quarter earnings volatility is common for agribusiness companies and generally does not impact ratings. However, recent earnings have been more volatile than would normally be anticipated. Robust liquidity is required to maintain agricultural processors' ratings to compensate for periods of lower earnings.

Cargill had total consolidated debt of $15 billion at Nov. 30, 2011. Liquidity is ample with more than $4 billion cash and short-term investments, as well as $6.25 billion of undrawn committed credit facilities, including $5 billion that serves as back-up liquidity for its commercial paper program. Cargill continues to be in compliance with its minimum net worth covenant on its credit facilities.

In addition to evaluating traditional credit measures, Fitch's analysis of agricultural commodity processors takes into consideration leverage ratios that exclude debt used to finance RMI. This commodity inventory is highly liquid and generally hedged. Similarly, interest expense on debt used to finance RMI is reclassified as cost of goods sold. With the RMI adjustments, Cargill's leverage (total debt to operating EBITDA) was 1.8 times (x) for the LTM ended Nov. 30, 2011, and EBITDA to gross interest expense was 7.9x. On an unadjusted basis, consolidated total debt to operating EBITDA was 3.9x and EBITDA/interest was 4.1x. Unadjusted leverage is currently high for the rating level and, as mentioned above, is likely to result in a downgrade without material improvement in the near term.

The current ratings for Cargill and its subsidiaries are as follows:

Cargill

--Long-term Issuer Default Rating (IDR) 'A';

--Senior unsecured notes 'A';

--Credit facility 'A';

--Short-term IDR 'F1';

--Commercial paper 'F1'.

Cargill Ltd.

--Short-term IDR 'F1';

--Commercial paper 'F1'.

Cargill Global Funding PLC

--Credit facility 'A';

--Short-term IDR 'F1';

--Commercial paper 'F1'.

Cargill Asia Pacific Treasury Ltd

--Short-term IDR 'F1';

--Commercial paper 'F1'.

The Rating Outlook is Negative.

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