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Rating Action:

MOODY'S DOWNGRADES CARGILL INCORPORATED'S AND GUARANTEED SUBSIDIARIES' LONG TERM RATING TO A2 FROM A1. PRIME-1 SHORT TERM RATING AFFIRMED. OUTLOOK FOR ALL RATINGS IS STABLE.

08 Jun 2004

Approximately $9.2 Billion In Debt Securities Affected

New York, June 08, 2004 -- Moody's Investors Service today downgraded the senior unsecured long term ratings for Cargill Incorporated and its guaranteed subsidiaries to A2 from A1. Cargill's short term rating was not on review, and is affirmed at Prime-1. The outlook for all of Cargill's ratings is stable.

The downgrade is based upon (1) Cargill's pursuit of a significantly increased capital expenditure and acquisition program as part of its multi-year business transformation efforts; (2) the uncertainty surrounding Cargill's strategy with regard to future acquisitions; (3) Moody's continuing discomfort with Cargill's proprietary trading and distressed asset investment businesses, which carry a greater risk profile than the company's traditional commodity-processing operations; (4) the expected deterioration in debt protection measures that will result upon the merger of Cargill's fertilizer business with that of IMC Global (B1 Senior Implied/On review for upgrade); and (5) the very low probability that, over the rating horizon, Cargill will improve its credit metrics to levels consistent with an A1 credit with its risk profile given its acquisition and expansion strategy.

The company's ratings continue to be supported by its powerful global commodity-oriented businesses which have tremendous scale, as well as geographic and business diversity. Market shares are strong in many of the businesses in which it competes, creating formidable barriers to entry to players not already in these scale businesses. The company also has the ability (although not presently the intent) to redeploy its cash flow toward greater leverage reduction should it need to do so. Cargill has a seasoned management team which continues to pursue a long-term approach to business development. Moody's noted that the company's liquidity profile is bolstered by its large readily-marketable commodity inventories. The ratings are constrained by the earnings volatility inherent in the commodity businesses in which Cargill competes, uncertainty surrounding the acquisition and expansion strategy the company is currently pursuing, the significant exposures within its high-yield and distressed debt portfolios and energy trading operations, and its high leverage for its rating category and business profile.

Cargill is about midway through a multi-year, multi-faceted transformation strategy, the stated intent of which is to shift its many business platforms further up the value-added chain and to provide higher margin solutions to its customers. As part of this effort, Cargill plans to expand existing higher value-added businesses and to enter new businesses both through green field development and acquisitions. As a result, its capital investment and acquisition spending are likely to be significantly higher than in recent years, resulting in very low free cash flow in relation to debt. Cargill's success to date in its transformation plan has been modest, in Moody's view. The company's businesses remain largely focused on relatively volatile, low-margin commodity businesses. Its most recently announced transaction of material size -- the merger of its fertilizer business with IMC Global -- is not, in our view, consistent with Cargill's stated strategy of moving up the value-chain into higher margin businesses. There remains, in Moody's view, significant uncertainty about Cargill's strategy as it pursues acquisitions and internal expansion and about the extent to which its long-term transformation plan will result in a less volatile cash flow profile with higher returns.

Cargill is also undertaking major changes to its risk management and financial services business. While the size and risk profile of these businesses were reduced in the late 1990s, they started to grow again in recent years and currently include a variety of proprietary trading and investment operations in diverse financial, energy, and real estate assets. While some of these activities are relatively low risk, others have a higher risk profile. Cargill is presently in the process of converting its proprietary bond trading operation (formerly the Global Capital Markets group) into an investment management company (Black River Asset Management). While Cargill will continue to wholly own Black River, the assets themselves will be held by a separate entity in which Cargill will reduce its investment to $400 million. The entity holding the assets will be majority owned by new third-party investors not connected to Cargill, and it will also be independently financed with no guarantees or recourse to Cargill. Moody's believes that this transaction reduces risks for this portion of Cargill's financial business as it materially reduces the capital that Cargill has at risk in this area.

However, following the Black River transaction, Cargill's exposure to higher risk investment and trading business will still be material. The company will continue to operate its Value Investment Group, which invests in assets such as high yield bonds and distressed loan and real estate portfolios. Additionally, it will continue to operate its growing energy trading operation. Together, assets in the businesses being retained represent approximately 60% of Cargill's consolidated equity. Moody's views these businesses as significantly riskier than Cargill's traditional commodity-oriented processing businesses, and as such are a negative rating factor. Higher interest rates could also increase uncertainty about future earnings from these businesses. Continued growth of these businesses could place additional downward pressure on Cargill's rating.

Cargill has announced plans to merge its fertilizer production operations with those of

IMC Global. The new company will remain a public entity owned approximately 66.5% by Cargill and 33.5% by existing IMC shareholders. The new entity will have approximately $4 billion in sales and will be a major worldwide phosphate and potash company. Management expects cost synergies to be approximately $145 million per year through the integration and optimization of operations. The company will initially have over $2.2 billion in debt -- almost all of which will be contributed by IMC. While the new entity will be consolidated into Cargill's financial statements, its financial obligations will not be guaranteed by or have recourse to Cargill. Nevertheless, the newly-merged entity will be relatively highly leveraged, and continue to operate in a very challenging and depressed fertilizer industry environment. As such, in order to protect its investment, Cargill could choose to support the entity if it were to run into financial difficulty. Moody's will therefore continue to consolidate the fertilizer operation and its debt into Cargill for analytic purposes. We view this transaction as making long-term strategic sense for Cargill's fertilizer business due to the apparent cost synergies that can be obtained by combining these two operations. In the near to intermediate term, however, the merger represents a credit negative due to the significant debt and high leverage of this entity which Cargill will now own and control.

At the completion of the Black River transaction and the IMC global merger, we expect Cargill's debt protection measures to deteriorate and remain very weak for an A2 rated credit in commodity and industrial businesses in which it competes. We anticipate that pro-forma free cash flow/debt will be less than 7%, with EBIT/assets below 6%. We note that the recent sharp rise in commodity grain prices has elevated Cargill's debt levels; however, leverage continues to be high for the rating category even after adjusting for this presumably temporary increase. Moody's notes that on an ongoing basis, we do not net the value of commodity grain inventories from debt when calculating leverage for commodity companies such as Cargill as such inventories represent a key component of the company's asset base without which it cannot operate its normal business. We do, however, recognize the ability to liquidate such inventories under a stress scenario in order to generate cash.

The stable rating outlook assumes no further increase in Cargill's risk profile or leverage. Cargill's long and short term ratings could be lowered if its operating performance weakens, its acquisition and expansion program results in weaker debt protection measures, or should risks and exposures in its distressed asset investment and energy trading businesses increase. If Cargill's leverage increases further such that retained cash flow to debt falls consistently below the 22% - 25% range, its ratings could be downgraded further. An upgrade is currently unlikely and would require that Cargill to demonstrate that its transformation strategy is resulting in higher margins and returns and greater earnings stability, that exposure to its distressed asset and energy trading operations is reducing, that leverage declines such that retained cash flow to debt is consistently within the 25%-30% range, and that it materially increases its free cash flow generation.

Ratings downgraded are as follows:

Cargill, Incorporated

Senior unsecured to A2 from A1

Cargill, Inc. Employee Stock Ownership Trust

Senior unsecured to A2 from A1 based on the unconditional guarantee of Cargill,

Incorporated

Cargill Investment Corporation

Preferred stock to A3 from A2, supported by keepwell agreement by Cargill, Incorporated

Cargill Ltd

Senior unsecured to A2 from A1 based on the unconditional guarantee of Cargill, Incorporated

Ratings affirmed are as follows:

Cargill, Incorporated

Short term at Prime-1

Cargill Global Funding PLC

Short term at Prime-1 based on the unconditional guarantee of Cargill, Incorporated

Cargill Asia Pacific Treasury Ltd.

Short term at Prime-1 based on the unconditional guarantee of Cargill, Incorporated

Cargill Australia Limited

Short term at Prime-1 based on the unconditional guarantee of Cargill, Incorporated

Cargill is a privately-held, leading global agribusiness based in Minnetonka, Minnesota.

New York
Angela Jameson
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Jersey City
Peter H. Abdill, CFA
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

MOODY'S DOWNGRADES CARGILL INCORPORATED'S AND GUARANTEED SUBSIDIARIES' LONG TERM RATING TO A2 FROM A1. PRIME-1 SHORT TERM RATING AFFIRMED. OUTLOOK FOR ALL RATINGS IS STABLE.
No Related Data.
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