Fitch assigns A+ rating to Monsanto's proposed issuance of 10- and 30-year notes totaling US$500M; outlook stable
July 9, 2012
– Fitch Ratings has assigned an 'A+' rating to Monsanto Company's (Monsanto) proposed issuance of 10 and 30 year notes totaling $500 million. The Rating Outlook is Stable. A complete list of ratings is provided at the end of this release.
The notes will be senior unsecured obligations and will rank equally with the company's $2.2 billion of debt as of May 31, 2012. Monsanto plans to use the net proceeds to repay its $486 million of 7 3/8% notes due Aug. 15, 2012 and any remaining proceeds for general corporate purposes. The notes are being issued under the company's indenture dated Aug. 1, 2002. Key covenants include restrictions on secured debt, sale and leaseback transactions, and mergers and asset sales. There are no financial covenants. The notes will have make whole call provisions as well as a put option upon a change of control and a downgrade of the notes below investment grade.
Fitch affirmed Monsanto's ratings on June 21, 2012. The ratings reflect the company's leading market positions in corn, soybean, cotton and vegetables seeds and traits, and its R&D-driven expertise in plant biotechnology that enables high profit margins and strong cash flows. The company's portfolio benefits from patent protection for most of its key products which creates high barriers of entry for new market entrants. In addition, Monsanto licenses its technologies and traits to its competitors. These agreements generate a recurring royalty stream that further supports the company's profitability.
Monsanto's credit profile is strong. The company generated $4.1 billion of operating EBITDA in the last 12 months (LTM) to May 31, 2012, corresponding to roughly 30% of net sales. LTM free cash flow was approximately $1.5 billion. Gross balance sheet debt to EBITDA leverage stood at 0.5 times (x). Net debt was $154 million including $1.7 billion of cash and cash equivalents and $302 million in short-term marketable securities.
The rating is constrained by the company's growth-through-acquisition strategy, its relatively concentrated product portfolio, and its sizeable dividends and share buyback program. Monsanto recently purchased Precision Planting, Inc. for $210 million with a performance-based payment of up to $40 million. Since fiscal 2007, Monsanto has completed multiple acquisitions totaling $3 billion to broaden its product portfolio into cotton, vegetables and other seeds and to expand its geographical footprint.
Shareholder-friendly actions include $632 million of dividends paid and $350 million of share buybacks net of proceeds from stock option exercises LTM to May 31, 2012. The Board of Directors recently approved a new $1 billion three-year share repurchase program, effective July 1, 2012, to commence after the completion of Monsanto's existing $1 billion program started in July 2010.
The Stable Outlook is based on robust operating performance and expectations for continued sales and earnings growth. In the first nine months of the company's fiscal 2012, sales grew 19% year over year to approximately $11.4 billion and gross profits increased to $6.2 billion or 54% of sales.
The company has substantial liquidity which totaled approximately $4 billion at May 31, 2012, based on the company's undrawn $2 billion revolving credit facility, cash and cash equivalents and short-term marketable securities. Monsanto's facility expires in April 2016, recently extended from April 2015, and requires the company to maintain a total debt to total capital ratio of less than 66 2/3%. Monsanto has significant headroom under the covenant as Fitch calculates the company's total debt to total capital is 15% at May 31, 2012. With Monsanto refinancing its $486 million of 7 3/4% notes maturing Aug. 15, 2012, the company's next maturity is $300 million of 2 3/4% notes due 2016, making their maturity schedule very manageable.
Fitch expects Monsanto to continue to generate positive free cash flow in most years and to maintain a strong credit profile appropriate for an R&D driven company. However, negative free cash flow over multiple years and deterioration of credit metrics due to sizeable M&A, substantial dividend increases or share buybacks that are debt-financed could lead to a negative rating action. Adverse outcomes resulting from the ongoing litigation with competitors or the Department of Justice's antitrust investigation that substantially impact Monsanto's businesses and market positions could also result in lower ratings or a Negative Outlook.
Catalysts for an upgrade or a Positive Outlook would be further regional and product diversification beyond corn & soybean seeds, traits and genomics in the Americas while maintaining sales growth, operating margins and cash flows.
Fitch currently rates Monsanto as follows:
--Long-term IDR at 'A+';
--Senior unsecured revolving credit facility at 'A+';
--Senior unsecured debt at 'A+';
--Short-term IDR at 'F1';
--Commercial Paper at 'F1'.
The Rating Outlook is Stable.
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