Fitch assigns A rating to Cargill's US$450M 4.10% senior unsecured notes due Nov. 1, 2042; outlook negative

Nevin Barich

CHICAGO , October 24, 2012 (press release) – Fitch Ratings has assigned an 'A' rating to Cargill Incorporated's (Cargill) $450 million 4.10% senior unsecured notes due Nov. 1, 2042. The Rating Outlook is Negative.

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 U.S. and one of the biggest privately owned companies in the world. Its operations span every major country and almost every agricultural commodity. Key agricultural operations include oilseeds processing, corn milling, meat processing, and animal nutrition. The ratings incorporate Cargill's extensive geographic and product line diversification, which should lessen operating earnings volatility during most years.

The ratings also factor in Cargill's liquidity, which is enhanced by readily marketable inventory (RMI) and substantial cash. Balancing out Cargill's credit strengths is the company's exposure to financial businesses that provide earnings diversification but have high earnings volatility. In addition, the company is susceptible to periodic negative free cash flow (FCF) when commodity prices rise and working capital increases in tandem, which occurred in fiscal 2011 and may return with the recent commodity price spike.

The Negative Outlook reflects that Cargill generated disappointing earnings in fiscal 2012, which, combined with the divestiture of Cargill's $19 billion equity stake in The Mosaic Company (Mosaic) in May 2011, resulted in a weaker credit profile and material increase in gross leverage versus historical levels, putting pressure on the ratings. Cargill utilized approximately $7 billion of Mosaic proceeds for acquisitions and debt reduction.

Cargill's net earnings rebounded strongly in the fiscal first quarter of 2013 ended Aug. 31, 2012 to $975 million, from $236 million in the prior year period. Each of the company's five business segments showed improvement. However, it is too soon to tell if the earnings improvement is sustainable. The U.S. drought impact is likely to provide near-term headwinds, including lower North American grain handling volumes and challenges in animal protein businesses. In contrast to the good start to fiscal 2013, Cargill reported a 56% decrease in earnings from continuing operations to $1.17 billion in fiscal 2012, from record high earnings the previous year. Earnings were hurt by reduced profits in U.S. beef, global soybean processing and asset management, as well as losses in cotton and sugar.

Cargill had total consolidated debt of $15.1 billion at Aug. 31, 2012. Liquidity is ample with $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. The company's long-term debt maturities consist of $1.5 billion remaining in fiscal 2013, $776 million in 2014, and $836 million in 2015.

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 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 1.1x for the LTM ended Aug. 31, 2012, and EBITDA to gross interest expense was 16.2x. On an unadjusted basis, consolidated total debt to operating EBITDA was 2.8x and EBITDA/interest was 6.5x.

What Could Trigger a Rating Action

Future developments, that may individually or collectively lead to a negative rating action include:

--Large, debt-financed acquisitions and/or lack of sustainability of Cargill's earnings recovery that began in the fiscal first quarter of 2013, without material debt reduction.

Future developments, that may potentially lead to a positive rating action include:

--A substantial decrease in leverage from fiscal 2012 due to significant, sustainable earnings improvement, along with the maintenance of high liquidity, could result in a Stable Outlook.

Fitch currently rates Cargill and its subsidiaries 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

--Long-term IDR 'A';

--Credit facility 'A';

--Short-term IDR 'F1';

--Commercial paper 'F1'.

Cargill Asia Pacific Treasury Ltd

--Long-term IDR 'A';

--Short-term IDR 'F1';

--Credit facility 'A';

--Commercial paper 'F1'.

The Rating Outlook is Negative.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 8, 2012).

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

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Fitch Ratings
Primary Analyst
Judi M. Rossetti, CPA/CFA, +1 312-368-2077
Senior Director
Fitch, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Carla Norfleet Taylor, CFA, +1 312-368-3195
Director
or
Committee Chairperson
Wesley E. Moultrie II, CPA, +1 312-368-3186
Managing Director
or
Media Relations:
Brian Bertsch, +1 212-908-0549
Email: brian.bertsch@fitchratings.com

Source: Fitch Ratings

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