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Global Credit Research - 27 Apr 2011
About $300 million of proposed notes rated
New York, April 27, 2011 -- Moody's Investors Service assigned a B2 Corporate Family Rating (CFR)
to Albaugh, Inc. (AI). We also assigned a B3 rating
to the proposed $300 million of Senior Unsecured Guaranteed rule
144A Notes due 2018 to be issued by Albaugh Netherlands BV (ANBV).
The proceeds from the proposed Notes will be used to repay a substantial
amount of existing secured and unsecured, some to be paid soon after
closing with the remainder to repay debt over time. Up to $20
million of the proceeds is expected to be used to make a distribution
to shareholders. This is Moody's first public rating for
AI. The proposed ratings are contingent upon completion of the
transaction upon terms that are substantially similar to the documentation
provided to Moody's and subject to a final review of the relevant
documents. The outlook is stable.
The B2 CFR reflects AI's' elevated leverage (pro forma Debt/EBITDA
of about 4.0x as of December 31, 2010), a history of
weak and volatile free cash flow generation, a relatively narrow
product portfolio (three products account for the vast majority of profitability),
a concentration of profitability and assets in South America (primarily
Argentina) and a single production/manufacturing site in North America.
While we recognize that the supply and demand dynamics in the global agricultural
sector are very favorable -- agrochemical related products manufactured
by AI have an unusual history of extreme volatility in earnings and cash
flows. This volatility has resulted in the need to seek amendments
in the lending agreements at AI's Argentine subsidiary such that
waivers through December 31, 2010 were sought and granted.
The proposed notes will be used to repay the outstanding amounts under
these agreements. The narrow product portfolio, extremely
volatile performance and the need for waivers are key factors in the assignment
of a B2 CFR rating. Performance in 2010 (ending December 31) represented
a considerable improvement over an unusually weak 2009 with operating
income moving from a substantial loss in 2009 to a material profit in
2010. A more detailed discussion of expected financial performance
can be found in Moody's upcoming Credit Opinion for Albaugh,
Inc. available to subscribers of Moodys.com. A positive
move in the rating would require a sustained track record of profitability
over the next eight quarters.
The ratings are supported by relatively strong market shares in specific
geographies and the generally positive outlook for global farm incomes
as a result of a step change in global crop prices driven by the prospect
of very favorable supply/demand dynamics in the global agricultural markets.
Further support for the rating is derived from the long history of the
company, founded in 1979 and incorporated in 1991, and the
relatively stable management tenures. The B2 CFR incorporates our
expectation that there will be significant restrictions on further material
distributions to shareholders of AI until leverage falls sustainably below
AI has a limited product portfolio -- specifically glyphosate (a
broad spectrum herbicide) has been the company's top selling product
for several years. Over the past three years, glyphosate
sales represented 38% - 64% of total net sales.
Given this concentration in a single product, the global supply/demand
dynamics for this product has materially impacted AI's financial
performance. In 2010, 64% of net sales were concentrated
in three products: glyphosate at 38%, 2, 4-D
at 14% and sugar at 12%. These same three products
accounted for the vast majority of the firm's 2010 EBITDA.
Moreover, sugar has not been a core product for the company but
was the second largest contributor to EBITDA in 2010 and is expected to
contribute more in 2011. Exposure to such a volatile commodity
is a concern given the company's size, which only maps to
the upper end of the single B rating category.
The stable outlook reflects our expectation that AI will generate positive
free cash flow over the next two years as glyphosate markets recover as
anticipated benefiting from strong demand from farmers for yield enhancing
inputs and additional investments in manufacturing capacity in South America.
Currently, upside to the rating is limited because of the focus
of the company on a few key product classes, the concentration of
profitability and asset in South America and its single manufacturing
site in North America. Still, a positive outlook could be
considered should the company be able to reduce leverage (through a sustainable
increase in EBITDA) and generate sustainable free cash flow to debt in
excess of 6%. Any decline in EBITDA margins or unexpected
increases in debt could cause a change in the outlook or a negative rating
The following summarizes the ratings activity.
Corporate Family Rating -- B2
Probability of Default Rating -- B2
Albaugh Netherlands BV
$300 mm Senior Unsecured Guaranteed Notes due 2018 -- B3 (LGD4,
Ratings outlook -- Stable
AI's liquidity will be primarily supported by its $90 million
revolving ABL credit facility and free cash flow. The company is
expected to have modest cash balances and an undrawn revolver initially,
but revolver usage is anticipated due to the businesses seasonality.
Cash flows are expected to benefit from modest capital expenditure requirements
(with projected capital requirements below depreciation levels and spending
limited to a few growth projects), a lack of a regular dividend,
and no principal amortization requirements on the proposed notes.
The ABL revolver has financial covenants -- including a leverage
ratio and interest coverage ratio. The company is expected to remain
in compliance with the financial covenants over the next 12-18
AI, a private company founded and controlled by Dennis Albaugh,
is a leading producer of off-patent (generic) agrochemicals used
for crop protection, with a focus on herbicides, fungicides,
plant growth regulators, and insecticides. They manufacture,
source, formulate, distribute and sell a broad portfolio of
agrochemicals in the United States, Argentina, Brazil,
Mexico, and Europe. In addition, they produce certain
basic chemicals, petrochemicals, phenolic resins, and
ethanol for their own use and for sale to third parties. The company
also manufactures sugar, which they mainly sell to third parties
engaged in the food and beverage industry. In Argentina,
they are also engaged in the production and sale in the local Argentine
market of corn, sorghum and soybean hybrid seed varieties.
Since their incorporation in 1991, they have grown organically and
through targeted acquisitions to become a vertically integrated company
and a leading producer of the three major off-patent agrochemicals
used worldwide -- Glyphosate, 2, 4-D and Atrazine.
The principal methodology used in rating Albaugh Inc. was the Global
Chemical Industry Methodology, published December 2010. Other
methodologies used include Loss Given Default for Speculative Grade Issuers
in the US, Canada, and EMEA, published June 2009
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Service information, and confidential and proprietary Moody's
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of assigning
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's assigns a B2 CFR to Albaugh; rates proposed Notes B3
250 Greenwich Street
New York, NY 10007
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