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Global Credit Research - 15 Dec 2010
New York, December 15, 2010 -- Moody's assigns a Baa2 rating to Agrium Inc.'s proposed
$500 million debentures due 2041. The debentures are a drawdown
from a previously rated SEC registered shelf. Proceeds from the
debentures will be used for general corporate purposes including the repayment
of (i) US$125 million aggregate principal amount of the company's
8.25% debentures due February 15, 2011; and (ii)
a portion of the outstanding borrowings under Agrium's bank facilities
used to fund part of the Australian Wheat Board (AWB) acquisition.
The use of proceeds is consistent with management's stated objective
of maximizing and growing the base retail business unit, providing
a stable earnings flow from diversified fertilizer assets and continuing
to expand through acquisitions.
Agrium's diverse business mix and credit metrics comfortably support the
Baa2 rating. Providing further support to the Baa2 rating is the
company's selling price advantage, a function of logistics,
in the Pacific Northwest relative to the majority of North American nitrogen
producers. Agrium's retail business ($6.4 billion
in revenues for the LTM period ending September 30, 2010) typically
provides a more stable flow of cash than the wholesale fertilizer business
albeit at lower margins. The rating is supported by four additional
considerations: 1) the prospect of strong near term fertilizer supply/demand
fundamentals and strong results from retail operations that generate robust
credit metrics; 2) the prudent growth initiatives, both organic
and through acquisition, and the track record of managing this growth
in a manner supporting the Baa2 ratings; 3) management's willingness
not to over pay for acquisition related growth; and 4) past history
of active reduction of debt, after periods of extraordinary growth.
Moreover, we expect management will maintain its historically conservative
financial policies and investment discipline. Indeed the use of
substantial amounts of cash to fund the AWB acquisition, along with
proposed future asset sales (described below), demonstrates management's
commitment to maintaining conservative financial policies. At September
30, 2010 Agrium had close to $900 million in cash on its
balance sheet much of which was used to fund AWB's US$1.2
billion purchase price.
On December 3, 2010, Agrium announced it had acquired AWB
for A$1.236 billion (approximately US$1.208
billion), following which AWB became a wholly-owned subsidiary
of Agrium. Agrium financed the acquisition using cash on hand and
borrowings under its bank facilities. Proceeds from the proposed
debentures offering will repay a portion of the bank facilities used to
purchase AWB. The purchase of AWB continues Agrium's strategy
of growing its retail business and provides the ability to enhance products
and services to growers in Australia and New Zealand by using Agrium's
international fertilizer and crop protection sourcing capabilities.
Management has estimated some A$17 million of synergies in 2011
with a plan, focused on margin improvement, for full synergies
of approximately A$40 million annually by 2012.
AWB is one of Australia's leading agribusinesses and conducts two
businesses — Rural Services (known as Landmark) and Commodity Management
(CM) providing services across the agriculture sector. Rural Services
includes over 200 company operated retail locations and wholesale customer
locations in Australia that offer a wide range of agribusiness products
and services to customers including merchandising, farm services,
wool marketing, livestock sales, real estate agency,
insurance and financial services. The Commodity Management division
has two key operating hubs, Australia and Geneva, and a smaller,
locally-oriented business in India. In Australia,
AWB's Commodity Management division provides services and products
required to market agricultural commodities from farm gate to first stage
processors, offering inland transport, storage and handling
from point of origin through to domestic and export facilities,
including rail and storage and handling infrastructure across Australia's
The CM division also acquires and sells grains, pulses and oilseeds,
enhancing margins by taking arbitrage positions, within defined
risk limits, when opportunities arise in the market. This
business was established in 2002 as a platform for to grow AWB's
international presence and business through the trading and supply of
commodities to existing and new customers. Agrium has announced
that a definitive agreement has been reached with Cargill, Incorporated
(Cargill A2/P-1) pursuant to which Cargill has agreed to acquire
a majority of the commodity management businesses of AWB with anticipated
completion in the first half of 2011. The purchase price,
a combination of cash and debt assumption, will be the net asset
value of the acquired businesses as at the completion date of the transaction
plus a premium. If the transaction had occurred at September 30,
2010, Agrium estimates that the proceeds from the sale, together
with the release of working capital from AWB Harvest Finance Ltd.,
would have been approximately A$870-million. Agrium
continues to evaluate the disposition of other businesses and the value
of these could be approximately A$55-million. Combined
with the proceeds from the sale to Cargill the possible proceeds total
an estimated value of A$925-million for the commodity management
businesses that Agrium has agreed to, or intends to, divest.
Of this total, approximately A$240-million would represent
indebtedness assumed by Cargill related to the acquired businesses.
Completion of the disposition to Cargill is subject to customary closing
and other conditions, including the receipt of all required regulatory
Agrium's liquidity is viewed as strong given the expectation of stable
operating cash flows combined with adequately sized bank facilities,
significant cash balances of close to $900 million at the end of
September 2010, while diminished, are expected to build again
from operations and proposed asset sales. The company also benefits
from a favorable debt maturity schedule. Agrium's credit profile
and ratings are enhanced by improving industry fundamentals which drive
positive cash flow from operations. Agrium's liquidity profile
consists of a $775 million five-year syndicated revolving
unsecured credit facility that Agrium Inc. and its wholly owned
subsidiary, Agrium U.S. Inc., entered
into on July 2007. Further supporting Agrium's historic liquidity
profile, is a $200 million accounts receivable (A/R) securitization
program through which certain subsidiaries sell their accounts receivable
balances to a financial institution on a non-recourse basis.
The facility provided Agrium with the flexibility to immediately realize
cash for the sale of receivables up to the amount of the program.
The A/R securitization program agreements expire in December 2012.
The company recently halted usage of this program in favor of less expensive
Agrium has a well structured historic debt profile with seven issues of
long term debt maturing between 2011 through 2036. The shortest
maturity is a debt issue of $125 million maturing in February of
2011 (likely to be repaid from the proposed debt offering) and the largest
is a $500 million debt issue maturing in May 2019. The average
size of the maturities is just over $300 million and as a group,
the seven issues totaled $2.1 billion at the end of 2010.
Historically, Agrium would typically see peak revolver usage in
the early to mid spring when seasonal inventories and receivables are
expanding. Non-cash working capital can be affected by an
increase in accounts receivable resulting from a late start of the spring
fertilizer application season and stronger than normal sales activity
late in the quarter. These receivables are expected to be collected
in the months of June and July.
The stable rating outlook reflects the prospect of robust industry conditions
and anticipated positive free cash flow generation during 2011 and 2012.
We believe that Agrium will maintain its historically conservative financial
policies and investment discipline. We expect management to lower
its debt position following sizeable debt financed acquisitions.
Despite the prospect of an improving agricultural environment in 2011
and beyond there are several considerations weighing on a positive rating
move in the near term. Two concerns focus on Agrium's willingness
to consider large debt financed acquisitions including the ensuing integration
efforts, and the possibility of future cash commitments associated
with strategic joint venture opportunities. In the event that Agrium
exceeds our expectations for cash generation and debt reduction,
we would consider a rating upgrade if debt-to-EBITDA of
2.0x and current debt-to-capital to 30% were
achieved on what would be a sustainable multi-year basis.
There is limited downward pressure at the current time. However,
should the company pursue a larger than expected number of purely debt
financed acquisitions (an event that is deemed unlikely at this time)
a rating downgrade or negative outlook may be warranted. Also,
should the global agricultural industry unexpectedly deteriorate,
negative ratings pressure could also develop as a result of depressed
cash flow and earnings metrics especially if retained cash flow-to-debt
were to drop below 20% or if debt-to-EBITDA were
to exceed 3.0x.
The last rating action was on March 18, 2010 when Agrium's
ratings were affirmed and removed from review for possible upgrade.
The principal methodology used in rating Agrium was Moody's Global Chemical
Industry rating methodology, published in December 2009 and available
on www.moodys.com in the Rating Methodologies sub-directory
under the Research & Ratings tab. Other methodologies and factors
that may have been considered in the process of rating this issuer can
also be found in the Rating Methodologies sub-directory on Moody's
Agrium Inc., headquartered in Calgary, Alberta,
Canada, is a leading global producer and marketer of agricultural
nutrients and industrial products and a major retail supplier of agricultural
products and services in both North and South America and Australia.
Agrium produces and markets three primary groups of nutrients: nitrogen,
phosphate and potash as well as controlled release fertilizers and micronutrients.
Agrium reported net sales of US$9.6 billion for the last
12 months ending September 30, 2010 an increase of some $500
million over the full year 2009.
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's assigns Baa2 rating to Agrium's proposed debentures
250 Greenwich Street
New York, NY 10007
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