Approximately $8 billion of debt securities affected
New York, May 08, 2015 -- Moody's Investors Service affirmed the A3 ratings of the Monsanto Company
(Monsanto) and changed its outlook to negative from stable. These
actions follow the announcement by Syngenta AG (A2, negative) that
it has rejected Monsanto's unsolicited bid of CHF449 per Syngenta
share in a combination of cash and stock. This would value Syngenta
at roughly US$45 billion with approximately US$20 billion
paid in cash. While Syngenta has rejected Monsanto's offer,
the negative outlook reflects heightened event risk at Monsanto,
as well as uncertainty over the funding of the cash payment required for
any eventual deal.
"Monsanto's bid is indicative of a more aggressive financial policy,
especially after it has levered up to undertake a sizable share repurchase
program over the past 10 months," stated John Rogers,
Senior Vice President at Moody's.
RATINGS RATIONALE
The A3 long-term debt and Prime-2 commercial paper ratings
reflect Monsanto's leadership position in genetically modified (GM) and
hybrid seeds, modest leverage (1.6x Net Debt/EBITDA,
Retained Cash Flow/Net Debt of 45%) and excellent liquidity.
These metrics include Moody's standard adjustments to financial
statements, which increase debt by $1.8 billion ($1.6
billion operating leases and less than $200 million of pensions).
The A3 rating assumes that management will adjust the pace of share repurchases
as it approaches its unadjusted 1.5x net debt/EBITDA target (1.3x,
as of February 28, 2015) to incorporate the seasonal generation
of free cash flow and will not exceed this target for any sustained period.
Monsanto's market position is supported by the largest germplasm library
in the industry, technology licensing agreements with its main competitors
and clearly defined research pipeline. The company is exposed to
headline risk related to GMO crops, litigation, weed resistance
to glyphosate herbicide and its market position. The A3 rating
incorporates the expectation that Monsanto will continue to pursue modest
acquisitions to enhance its technology portfolio and market position.
While the company is subject to large seasonal swings in working capital
and free cash flow, it is expected to maintain a large cash balance,
which will reduce seasonal variability in the amount of short term debt
outstanding.
Monsanto commercial paper rating at Prime-2 reflects excellent
liquidity with over $2 billion of cash on its balance sheet and
Moody's expectation that it will generate over $1 billion
of free cash flow. Its secondary liquidity is provided by a $3.0
billion credit facility maturing in 2020; this facility also backstops
its commercial paper program. In addition, it has various
agreements with banks that allow the sales of receivables and undertake
customer financing in the US, Europe and Latin America There was
roughly $50 million outstanding under the receivable programs and
Monsanto guaranteed $85 million under the customer finance agreements
as of February 28, 2015. Monsanto has roughly $700
million of debt maturing in 2016.
NEGATIVE OUTLOOK
The negative outlook reflects the heightened event risk at Monsanto due
to its unsolicited offer for Syngenta and the likelihood that Monsanto's
rating would be downgraded if it were to reach an agreement with Syngenta.
Given the size of Monsanto's initial offer, it would have
to issue a substantial amount of additional equity to fund the cash portion
of the transaction in order to retain an investment grade rating.
Any transaction would also likely result in a downgrade of Syngenta's
ratings; the company's rating outlook is already negative.
The combination of Monsanto and Syngenta would create an extremely large
company in the agricultural chemical and seeds market with sales of almost
three times its nearest competitor. However, Moody's
believes that regulators would force the combined company to sell certain
assets or license technologies to other competitors prior to approving
this combination. Monsanto will have to increase its bid to successfully
negotiate an agreement with Syngenta. However, even if Syngenta
accepted this offer, the combined company would have roughly $32
billion of balance sheet debt (assuming that 90% of the cash required
is funded with debt, 10% from existing cash balances) and
roughly $8 billion of EBITDA (assuming over $500 million
of synergies). Moody's adjusted credit metrics would deteriorate
significantly with Net Debt/EBITDA rising to over 4x. Monsanto
would have to generate upwards of $10 billion from the issuance
of additional equity or the sale of assets.
Moody's would not raise Monsanto's rating while the potential
for such a large transaction is high. In addition, its stated
financial policy would not generate credit metrics supportive of a higher
rating. However, if Monsanto's financial policy is adjusted
to maintain a Moody's adjusted Debt/EBITDA of below 1.5x and Retained
Cash Flow/Debt of over 40%, a ratings upgrade would be considered.
Monsanto's ratings could be downgraded if any transaction would
sustainably weaken its Moody's adjusted Debt/EBITDA above 2.5x,
Retained Cash Flow/Debt below 25% or Free Cash Flow/Debt below
5% or if the level of liabilities arising from litigation were
to rise materially above current expectations.
The principal methodology used in this rating was the Global Chemical
Industry Rating Methodology published in December 2013. Please
see the Credit Policy page on www.moodys.com for a copy
of this methodology.
Headquartered in St. Louis, Missouri, Monsanto Company
is a global producer of agricultural chemicals and seeds. It is
the largest producer of genetically modified seeds globally and is one
of the largest producers of hybrid seeds. Monsanto's businesses
are managed through two segments: Seeds & Genomics and Agricultural
Productivity. The company has revenues of over US$15 billion.
Headquartered in Basel, Switzerland, Syngenta is one of the
world's largest agribusinesses with sales of over US$15 billion.
The largest markets for Syngenta's integrated Crop Protection and Seeds
businesses are North America (24% of sales), Europe,
Africa and Middle East (30%),Latin America (28%) and
Asia-Pacific (13%), with Lawn & Garden accounting
for the remaining 5% of group sales. While Syngenta's growing
presence in Latin America has helped reduce the degree of seasonality
affecting the company's revenues and earnings, sales and operating
profit are still weighted towards the first half of the calendar year,
reflecting the planting and growing cycle in the Northern Hemisphere.
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 rating action on the support provider and in relation to each particular
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 rating action, and
whose ratings may change as a result of this 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.
John P Rogers
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Brian B Oak
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's changes Monsanto's outlook to negative
