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Rating Action:

MOODY'S CONFIRMS AGCO RATINGS, SECURED AT Ba1 AND SENIOR UNSECURED AT Ba3; OUTLOOK IS NEGATIVE

11 Dec 2003
MOODY'S CONFIRMS AGCO RATINGS, SECURED AT Ba1 AND SENIOR UNSECURED AT Ba3; OUTLOOK IS NEGATIVE

Approximately $800 Million of Debt Affected

New York, December 11, 2003 -- Moody's Investors Service confirmed the long-term ratings of ACGO Corporation (secured bank facility at Ba1, senior implied at Ba2, senior unsecured at Ba3, and senior subordinate at B1) and changed the outlook to negative. The confirmation reflects Moody's expectation that despite the increased leverage that will result from the €600 million Valtra acquisition, AGCO's strategy of acquiring farm equipment operations and pursuing increased operating efficiencies as these businesses are integrated, has lain the groundwork for the company to become a more profitable and formidable competitor in the global farm equipment industry. This improvement should be supported by a recovery in the US farm equipment market, which accounts for about 20% of AGCO's pro forma revenues. US farmers are benefiting from record cash receipts, strong balance sheets, rising commodity prices, and the passage of the US Farm Bill. We also expect that AGCO is entering a period in which further debt-financed acquisitions will not be a material part of its ongoing strategy, and that the restructuring initiatives which have been needed to integrate these businesses and to right-size capacity have largely been completed. As a result, the company should begin to generate stronger earnings and cash flow, to steadily reduce debt, and to strengthen debt protection measures.

Valtra is the leading tractor producer in Scandinavia and the third-largest producer in Brazil. It has been able to continuously grow its sales during the past five years and maintain respectable operating margins despite the farm equipment downturn. The company also has a highly efficient manufacturing model. Moody's believes that the acquisition will help to further strengthen AGCO's global tractor operations. However, the agency also believes that the €600 million purchase price represents a relatively high valuation for the company's current earnings and revenue stream.

Ratings confirmed include:

AGCO Corporation - Ba1 rating on senior secured revolving credit facility; Ba2 senior implied rating; Ba3 senior unsecured notes and B1 senior subordinated notes.

The negative outlook reflects the uncertainty around AGCO's completion of a minimum $250 million equity issuance as part of the Valtra financing. The timing of this issuance will be largely driven by the closing date of the acquisition which is contingent upon regulatory approval in Europe and Latin America. A failure to successfully complete the equity transaction would result in AGCO's having to finance the Valtra acquisition totally with debt, and would further extend the time frame over which the company could restore debt protection measures to a level consistent with the current ratings. This would place considerable near-term pressure on the ratings. Should AGCO complete the equity placement, it would still face various operational and financial challenges during the next 12 months. AGCO's European markets, which account for about 50% of total pro forma sales, will likely remain depressed through 2004; its debt protection measures (even with a completion of the equity issuance) will remain very weak into 2004; covenant provisions under bank lending agreements would likely afford the company with only modest head room; and, it must effectively integrate the Sisu engine operations of Valtra. Sisu represents AGCO's first foray into vertical integration, and will present a unique set of integration challenges. To avoid pressure on the rating and forestall the possibility of a potential downgrade AGCO must: 1) successfully complete a minimum $250 million equity issuance during the near-term, and 2) begin to harvest the anticipated benefits of its past acquisition and restructuring initiatives, and thereby generate increasing levels of free cash flow that will be used to reduce debt during the next twelve months.

At September 2003, AGCO had $786 million in funded debt and about $400 million outstanding under various ABS facilities; funded debt includes $276 million outstanding under a secured revolving credit facility rated Ba1. Moody's expects that the financing of the €600 Valtra purchase price will include a minimum $250 million issuance of common equity and a sizable increase in secured bank debt. This will raise total funded debt to approximately $1.2 billion, and secured borrowings could represent 30% of tangible assets. Under this scenario, secured lenders would retain sufficient asset protection to warrant a Ba1 rating - one notch higher than the Ba2 senior implied rating. Senior unsecured creditors and senior subordinated creditors would remain, respectively, one notch below the senior implied rating (at Ba3) and two notches below the senior implied (at B1).

Moody's believes that AGCO's operating performance reflects a degree of the success it has had in consolidating acquisitions and revamping operations in order to achieve greater efficiencies. Despite a severe, five-year downturn in the farm equipment sector, AGCO has:

* averaged breakeven net income since 1999, with net income that should exceed $60 million during 2003 despite an average of $30 million in annual restructuring and other charges that we do not expect to reoccur.

* steadily improved its EBITDA margin from under 6% in 1999 to a level approximating 8% for 2003.

* generated positive free cash flow since 2000.

Strategically, AGCO has also been able to establish increasingly competitive market positions in the European, North American and Latin American regions.

Despite operating performance that has held up during the downturn, AGCO's debt protection measures have remained well below expectations due to a series of acquisitions that have been funded with a large debt component - AgChem in 2001 for $147 million, Challenger in 2002 for $60 million, and Valtra in 2004 for €600 million. As a result of these transactions, and various restructuring initiatives necessary to fully integrate these and previous acquisitions, AGCO's debt levels have remained high and debt protection measures have remained stressed for the current rating level. For 2003, pro forma debt/EBITDA could approximate 4.0x, retained cash flow to debt will be in the low teens, and interest coverage will likely be under 3x. However, if the company capitalizes on the competitive position that it has been building, cash generation could improve markedly, debt could begin to be reduced, and the company could solidify its position at the current rating level by late 2004.

AGCO Corporation, headquartered in Duluth, GA, is a global designer, manufacturer and distributor of agricultural equipment and related replacement parts.

New York
Michael J. Mulvaney
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
J. Bruce Clark
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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