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Rating Action:

Moody's assigns Baa3 to UPL Corp's proposed senior unsecured notes; outlook stable

08 Jun 2020

Singapore, June 08, 2020 -- Moody's Investors Service has assigned a Baa3 rating to the proposed senior unsecured notes to be issued by UPL Corporation Limited (UPL, Baa3 stable).

The rating outlook is stable.

The proposed notes rank pari passu with UPL's existing senior unsecured notes maturing in October 2021, and are therefore rated at the same level as these notes and UPL's Baa3 senior unsecured and issuer ratings.

UPL plans to use part of the bond proceeds towards debt repayment and keep the remainder to shore up its liquidity amid the challenging operating environment.

RATINGS RATIONALE

"The Baa3 ratings reflect UPL's large scale and status as the world's largest post-patent agrochemicals company. They also reflect its geographically diversified operations and presence across the entire spectrum of the agricultural value chain," says Kaustubh Chaubal, a Moody's Vice President and Senior Credit Officer.

UPL's operations comprise UPL Limited, the ultimate holding company of the group, UPL Corp, and various operating subsidiaries. All UPL companies operate through a centralized treasury function that is housed under UPL Limited. There is significant overlap between the group's Indian and overseas operations, and Moody's ratings on UPL therefore reflect the credit quality of the group as a whole.

The coronavirus pandemic has a moderate impact on UPL's credit quality. As an agricultural chemical producer, demand for UPL's products should largely remain resilient, supporting mid-single digit revenue growth and EBITDA margin in the 21%-23% band during the fiscal year ending 31 March 2021 (fiscal 2021).

"The proposed USD bond issuance comes at a time when the pandemic could lead to elongated working capital cycles, cause some supply disruptions and reduce free cash flow generation during fiscal 2021. This could lead to an increase in gross debt levels and slow the company's deleveraging. Even so, we view the proposed transaction as a liquidity booster and a reflection of UPL management's proactive approach to liability management and prudent financial policies," adds Chaubal, who is also Moody's Lead Analyst for UPL.

Pro-forma for the proposed bond issuance, Moody's expects UPL's leverage -- as measured by adjusted gross debt/EBITDA -- to remain around 4.0x until March 2021. Assuming around $300 million of cash is needed for day-to-day operations and the surplus cash is applied towards retiring debt, Moody's estimates that UPL's net leverage will remain below the 2.7x mark for the same period.

In Moody's view, UPL can be rated one notch higher than the Indian sovereign (Baa3 negative) because of the company's: (1) global operations, with just 10% of its revenues derived from India; (2) reliance on a diverse pool of funding sources from Indian and foreign banks, including bank borrowings and the INR and USD capital markets; and (3) weak exposure to a potential sovereign credit stress or default.

However, UPL's underlying credit profile is not significantly stronger than that of the Indian sovereign. Moreover, UPL Limited is an Indian company, part of its manufacturing operations are housed in India, and it is listed on the domestic stock exchanges. As such, the credit quality of UPL cannot be completely delinked from the sovereign rating.

Fundamentally, the Baa3 ratings are constrained by UPL's elevated financial metrics that are stretched for its ratings, execution risks associated with its ability to continue extracting synergies from the Arysta acquisition, including by rationalizing working capital and the inherent risks associated with the time-consuming and stringent regulatory requirements for the industry, especially in terms of product registrations.

Liquidity

UPL's liquidity is excellent. As of 31 March 2020, UPL had cash and cash equivalents of INR67.5 billion ($900 million), which, along with the expected cash flow from operations of INR58 billion ($758 million) in fiscal 2021, will be adequate to fund its capital spending, dividends and scheduled debt maturities. The proposed USD bond issuance will further improve the company's liquidity profile and strengthen its capacity to manage potential pandemic-related shocks.

UPL's liquidity is further supported by its access to INR104.3 billion ($1.4 billion) of 364 day short-term working capital credit facilities (of which only 15% was utilized) and $100 million of unutilized limits of the $1.0 billion non-recourse factoring facility, as of March 2020

ESG considerations

As an agrochemical company, UPL faces a moderate level of environmental risk, primarily in the form of air, soil and water emissions, as well as hazardous waste cleanup. The main social risks faced by UPL Group are the changing demographics and shifts in dietary consumption across emerging markets.

Ownership and control are key to Moody's assessment of governance risk, with concentrated ownership having either a positive or negative influence on corporate performance. Concentrated ownership and control can raise potential conflicts of interest and/or related-party transactions that are not aligned with creditor interests. UPL Limited is 27.9% owned by the promoter family, led by Rajnikant Shroff, who is the company's chairman and managing director. UPL Corporation is 78% owned by UPL Limited. And private equity firm TPG Capital and the Abu Dhabi Investment Authority, a sovereign wealth fund, each hold a 11% stake in UPL Corp.

The private equity shareholders of UPL Corp, the diversified shareholding in UPL Limited and the presence of independent directors on the boards of both companies support Moody's view that corporate governance risk is manageable at the current time. UPL Limited disclosed to the stock exchanges that a search was carried out by the Indian Income Tax authorities of its premises in multiple locations in India to better understand some of UPL's international operations and transactions. Moody's continues to wait for additional information from the said search.

Outlook

The stable outlook reflects Moody's view that UPL will maintain a strong business profile with credit metrics appropriate for its Baa3 rating, and that it will not undertake any large or transformational acquisitions, at least until Arsyta is completely integrated and the company's financial profile has been restored to pre-acquisition levels.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING

UPL's ratings are capped at one notch higher than the Indian sovereign. As such, a positive rating action would require a return in the outlook on India's sovereign rating to stable.

An upgrade would also require tangible benefits following the seamless integration of the company's 2018 acquisition of Arysta Life Sciences, with EBITDA margins at the higher end of the 22%-25% range, debt/EBITDA leverage well below 2.5x and consistent positive free cash flow generation, all on a sustained basis.

A downgrade of the Indian sovereign below Ba1 will result in an immediate downgrade of UPL's Baa3 issuer rating, given the one-notch ratings cap.

UPL's ratings could also be downgraded if EBITDA margins fall below 18%, gross debt/EBITDA leverage remains above 3.5x and net debt/EBITDA exceeds 2.7x, all on a sustained basis. Any large debt-funded acquisitions that materially weaken the company's financial profile would also pressure the ratings.

The ratings incorporate Moody's assumption that UPL Corp remains an integral part of UPL Group and that the significant inter-linkages between the two will continue. Therefore, any further material divestiture in UPL Corp by UPL Group, or any significant increase in dividend payments by UPL Corp, will be viewed negatively.

The principal methodology used in this rating was Chemical Industry published in March 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1152388. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Incorporated in Mauritius, UPL Corporation Limited (UPL Corp), is a 78% owned subsidiary of UPL Limited. Private equity firm TPG Capital and the Abu Dhabi Investment Authority, a sovereign wealth fund, each hold a 11% stake in UPL Corp. UPL Limited is one of the largest agro-chemicals companies globally, operating in the post patent markets. For the fiscal year ended 31 March 2020, UPL Limited reported revenues of INR357.6 billion ($4.8 billion) and adjusted EBITDA of INR74.8 billion ($997 million).

Headquartered in Mumbai and listed on the National Stock Exchange and Bombay Stock Exchange, UPL Limited is 27.9% owned by the promoter family, led by Rajnikant Shroff, who is the company's chairman and managing director.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Kaustubh Chaubal
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Ian Lewis
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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