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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,
* 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
AGCO Corporation, headquartered in Duluth, GA, is a
global designer, manufacturer and distributor of agricultural equipment
and related replacement parts.
Michael J. Mulvaney
Corporate Finance Group
Moody's Investors Service
J. Bruce Clark
Senior Vice President
Corporate Finance Group
Moody's Investors Service
No Related Data.
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