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Rating Action:

Moody's affirms DuPont's A3 ratings, changes outlook to stable

06 Nov 2018

New York, November 06, 2018 -- Moody's Investors Service ("Moody's") affirmed the A3 and Prime-2 ratings of E.I. du Pont de Nemours and Company (DuPont) and changed the outlook on the ratings to stable from negative. The action is in response to the company's disclosure of its plan for the balance sheet of DuPont, which is expected to become wholly owned by a new legal entity, Corteva, Inc. On June 1st, 2019, Corteva Inc. (Corteva) is expected to be spun off from DowDuPont, and any existing rated debt of DuPont will become the obligations of Corteva.

"The change in outlook reflects a commitment to a more conservative financial policy with minimal long term debt" according to Joseph Princiotta, Moody's Senior Analyst for DuPont. "Despite the low debt, Moody's debt adjustments add about $4.0 billion to debt, while Corteva's ag business exhibits large seasonal working capital needs financed primarily with commercial paper usage that can surge up to $4.0 billion," added Princiotta.

Outlook Actions:

..Issuer: E.I. du Pont de Nemours and Company

....Outlook, Changed To Stable From Negative

Affirmations:

..Issuer: E.I. du Pont de Nemours and Company

.... Issuer Rating, Affirmed A3

....Senior Unsecured Shelf, Affirmed (P)A3

....Senior Unsecured Commercial Paper, Affirmed P-2

....Senior Unsecured Regular Bond/Debentures, Affirmed A3

RATINGS RATIONALE

Upon the spin from DowDuPont on June 1st, 2019, Moody's adjusted debt of Corteva is expected to be lowered to roughly $4.0 billion, using cash on the balance sheet and proceeds from debt raised (by New DuPont) prior to the spin. Moody's adjustments to balance sheet debt include unfunded pensions, operating leases and other liabilities, either remaining with Corteva (as the surviving entity to DuPont) or transferred to Corteva. Moody's expects adjusted leverage to be in the mid 1.0x range at the time of the spin as a result of the lower adjusted debt.

The A3 rating reflects Corteva's scale, market positions, franchise strength, strong distribution and farmer relationships, and a robust pipeline that position it very well in what continues to be a competitive and consolidating global agricultural landscape. Corteva will be the largest multinational pure-play seed and crop protection company in the world, with a management team that has deep and extensive experience in their respective positions. The ratings also reflect ongoing pressures in the ag space, due primarily to low crop prices and weak farm economics, and a highly competitive market with large well-capitalized players competing for market share and growth and facing the risk of share loss from competitors' new products.

Moody's expects Corteva to maintain a credit profile consistent with the A3 ratings, including a strong balance sheet with modest adjusted financial leverage; disciplined investment in growing the business, including occasional bolt-on acquisitions to strengthen the portfolio; an appropriate dividend payout ratio as a percent of cash flow and net income over time; adequate liquidity to support seasonal working capital surges; and share repurchases with excess cash flow when preceding priorities are met.

The combined ag portfolios of Dow and DuPont that have created Corteva will have close to $15 billion in revenues at the time of the spin, with strong competitive positions in seeds and crop-protection products and an EBITDA margin in the high-teens. In seeds, Corteva's portfolio consists of a leading and extensive germplasm library that provides market leadership and significant barriers to entry. Corteva is second only to Bayer (which recently acquired Monsanto) in seeds, with the two companies holding over 75% of the global share in seeds. In crop protection, Corteva is more diversified with more than half the portfolio in fruits and vegetables, soybeans, cereal, corn and rice and the balance in land management and other categories. The company is number one in global herbicides and naturally derived insecticides.

The company achieved 75% of the $1.1 billion synergy target on a run-rate basis as of September 2018 and expects to achieve 100% on a run-rate basis of the recently expanded $1.17 billion target by September 2019. We believe this target is achievable and the company is on or ahead of schedule. In addition, the company intends to generate an additional $500 million in growth synergies over time.

Despite a still-challenging global ag market, where growth is likely to remain subdued in the aggregate in 2018, Corteva's growth is expected to outperform the market, due in large part to new product introductions. Corteva's guidance for the full year remains positive with operating EBITDA growing in the mid-single digit percentage range due to cost savings from the merger with Dow. New crop protection products are an important part of growth in 2018, contributing meaningfully to sales with the impact from new products expected to increase beyond 2018.

Notwithstanding the favorable longer term secular trends, including population growth and growing per capita meat and grain consumption, the industry is highly competitive with large, well-capitalized competitors including Bayer, Syngenta, BASF, Sumitomo Chemical, and FMC. Moreover, recent and current conditions in the global seed and crop protection market remain challenged, with soft commodity prices continuing to weigh on farm incomes, resulting in cautious buying behavior and elevated inventories in various areas of the distribution channel. We expect stress in the agricultural sector to continue, limiting demand for agricultural chemicals, fertilizers and seeds.

Moody's believes The Chemours Company and DuPont face litigation risk stemming from new litigation filed in 2018 in North Carolina and Ohio associated with perfluorochemicals (or PFCs), a family of chemicals used for decades to process fluoroproducts, including the Teflon™ line of cookware products. Chemours indemnified DuPont for activities that occurred prior to the Chemours spin in June 2015. However, the companies amended the Indemnification Agreement last year, obligating DuPont to pay the second $25 million each year for up to 5 years (4 years remaining). We note that DuPont shared 50% of the $670.7 million personal injury settlement associated with the Washington Works facility last year as part of this amendment. (see New Lawsuits Heighten Risk to Chemours and DuPont, February 27, 2018).

We view DuPont's liquidity profile currently as excellent and supportive of its Prime-2 rating for its commercial paper program. As of September 30, 2018, the company's liquidity was supported by $3.8 billion in cash and marketable securities, strong cash flow from operations, a $3.0 billion committed revolver and a $2.5 billion committed undrawn term loan. Looking ahead to the spin, Corteva's Prime-2 rating will be supported by primary liquidity provided by a combination of $2.0 billion in cash, strong cash flow from operations, a committed revolving credit facility for seasonal woking capital needs similar in size to the current committed revolver and TL facilities, and a committed A/R program. We note the ag business of Corteva is highly seasonal with large working capital needs, typically in the second and third calendar quarters, requiring seasonal borrowings in the form of CP usage that can surge up to $4.0 billion before being liquidated in subsequent quarters.

The stable outlook anticipates adherence to conservative financial policies that support the A3 ratings. The stable outlook also anticipates continued success of new product launches and further growth in revenues and EBITDA, organically or through modest M&A.

Moody's would be unlikely to consider an upgrade to Corteva's ratings in the early years of its independence and until there's better clarity and impact from new product launches and until cost synergies are fully realized. However, beyond that, Moody's could consider an upgrade if Corteva maintains a solid balance sheet with adjusted leverage consistently in the mid-1.0x range and a track record of successful new product launches and sustaining a robust research pipeline. Also, a consistent and well-managed pattern of seasonal working capital and seasonal debt peak usage would be important to a higher rating consideration.

Moody's would consider a downgrade if balance sheet leverage were to increase materially, either from a deterioration in earnings or from large or frequent debt-financed acquisitions. Leverage rising to the mid-2.0x range or RCF/TD sustained below 30%, and lacking good visibility to quick recovery, could lead to a downgrade of the ratings. A material weakening of cash flow or liquidity could also pressure the ratings.

The principal methodology used in these ratings was Chemical Industry published in January 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Corteva Inc., headquartered in Wilmington, Delaware, will be one of the largest Agricultural Chemicals companies, with leading positions and a robust pipeline in Seeds & Traits and Crop Protection, with over 100 manufacturing sites, 140 R&D sites, 12,000 patents, and digital capabilities and programs. Revenues for 2017 were approximately $14.1 billion, consisting of a $6.1 billion crop protection business and $8.1 billion seeds business.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Joseph Princiotta
VP - Sr Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Brian Oak
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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