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Rating Action:

MOODY'S ASSIGNS (P)Ba1 RATING TO NEW BANK FACILITY OF AGCO CORP., Ba3 TO ITS SENIOR SUBORDINATED NOTE ISSUE, AND UPGRADES ITS CONV. SUB. DEBS. TO Ba3 FROM B1

05 Mar 1996
MOODY'S ASSIGNS (P)Ba1 RATING TO NEW BANK FACILITY OF AGCO CORP., Ba3 TO ITS SENIOR SUBORDINATED NOTE ISSUE, AND UPGRADES ITS CONV. SUB. DEBS. TO Ba3 FROM B1 New York, 03-05-96 -- Moody's Investors Service assigned a (P)Ba1 to the new $650 million unsecured bank facility of Agco Corporation; assigned a Ba3 to its new issue of $200 million in senior subordinated notes; and upgraded its convertible subordinated debentures to Ba3 from B1.
The senior subordinated notes will be sold in a privately negotiated transaction with registration rights under the Securities Act of 1933 (the "Act") under circumstances reasonably designed to preclude a distribution thereof in violation of the Act. This issue has been designed to permit resale under rule 144A.
The rating upgrade reflects the company's improved margins and debt service measurements; progress in integrating its various acquired companies; lower fixed costs; and declining financial leverage. However, the rating also reflects the risks of operating in a cyclical industry, competing against formidable players in key markets, dependence on an increasingly leveraged retail finance operation to facilitate its sales efforts; and the challenge of integrating and improving the quality of a large independent dealer base.
Agco has reduced operating expenses by completing the integration of its international operations (Massey Ferguson); has increased revenues by increasing the number of cross-over contracts, which allow its dealers to carry more of its brands; and has kept fixed costs to a minimum by outsourcing a higher level of its production relative to its competitors. Earnings have been augmented by a 25% increase in sales of replacement parts, a higher-margin business that is also less cyclical than its equipment business. And because parts still represents only 14% of Agco's revenues outside the U.S., compared to 25% of revenues in the U.S., there is potential for additional improvement.
Agco's debt, excluding finance subsidiaries, was about 41% of total capitalization as of December 1995, and will drop further when the company calls its subordinated debentures for conversion into common stock this June.
Leverage of Agricredit, however, is quite high, at around 90%. Agricredit finances about 44% of Agco's total equipment sales. About 78% of Agricredit's portfolio relates to sales of Agco equipment, up from 67% last year. The balance relates to purchases of other manufacturers' products. Leverage will likely increase as the company continues to grow, and may rise further as it increases its penetration in its new dealers. And while Agco is in preliminary discussions to sell a 51% interest in Agricredit to Rabobank Nederland, Moody's will continue to view the financial strength of Agricredit as a vital interest to Agco.
While Agco continues to diversify geographically, it has a modest 13% market share in the U.S. In the U.S, Agco relies more on dealer loyalty than brand loyalty, but during the time it takes the company to complete its dealer integration, it may have difficulty in increasing its market share. Deere and Case, which concentrate on larger, higher cost equipment, offer a longer history of servicing their brands and may be perceived to provide stronger customer support.
In Europe, on the other hand, Agco relies on loyalty to its Massey Ferguson brand. Agco may be able to leverage the Massey Ferguson Brand to introduce new products. In this more fragmented market, Agco's 15% estimated market share edges those of Deere and Case, but trails that of NH Geotech (Ford/Fiat), which leads with about 20%.
Concurrent with the new notes issue, Agco will replace its existing $550 million secured revolving credit facilities with a new five-year $650 million unsecured multi-currency revolving credit facility. The new facility contains various negative covenants which limit the amount of additional debt, new liens sale/leaseback transactions, intercompany loans, among other restrictions. Agco will apply proceeds of its ten-year fixed rate notes to pay down outstanding floating-rate amounts under its existing facility.
Agco Corporation, based in Duluth, Georgia, is a major worldwide distributor and manufacturer of agricultural equipment and related parts.

No Related Data.
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