TEXT-S&P: Gavilon Group ratings remain on watch positive

Tue Oct 9, 2012 4:25pm EDT

Overview
     -- Our ratings on U.S.-based The Gavilon Group LLC, including the 'BB' 
corporate credit rating, remain on CreditWatch, where they were placed with 
positive implications following Tokyo-based Marubeni Corp.'s 
(BBB/Negative/--) May 2012 announcement that it will buy Gavilon for $3.6
billion excluding debt.
     -- Gavilon recently received an amendment on its bank term loan and 
revolving credit facilities agreements that provided financial covenant relief 
through the end of the year and amended its change-of-control clause to permit 
Marubeni to acquire Gavilon without causing default.
     -- We are revising our liquidity assessment for Gavilon to "adequate," 
following the company's recent amendment. 
 
Rating Action
On Oct. 9, 2012, Standard & Poor's Ratings Services said that its ratings on 
Omaha-based The Gavilon Group LLC, including the 'BB' corporate credit rating, 
remain on CreditWatch with positive implications, following an internal review 
of the corporate credit rating, including the company's liquidity position. 

Gavilon Group had reported debt outstanding of $1.6 billion as of June 30, 
2012. 

Rationale
We originally placed the ratings on Gavilon on CreditWatch with positive 
implications on May 30, 2012, following Marubeni's May 2012 announcement that 
it will buy Gavilon for $3.6 billion excluding debt. We still believe that 
Gavilon's credit profile will improve following its proposed acquisition. In 
addition, we have revised our liquidity assessment for Gavilon to "adequate" 
from "less than adequate," given the covenant relief it obtained in its most 
recent bank amendment that relaxed the maximum permitted leverage and minimum 
permitted interest coverage ratios until Dec. 31, 2012. We continue to believe 
Gavilon's earnings will remain pressured in the near term, primarily because 
of weakness in the company's more volatile energy business segment, which 
generated an EBITDA loss through the first half of fiscal 2012 (ended June 30, 
2012). Still, we believe the covenant amendment will allow the company to have 
adequate cushion on its financial covenants over the next year.

We assess Gavilon's business risk profile as "fair" and its financial risk 
profile as "aggressive." Key credit factors in Gavilon's business risk 
assessment include the company's earnings volatility, business segment 
diversification, improving market position, and sound risk management 
practices. However, we believe Gavilon's credit measures may weaken further in 
the coming quarters before they begin improving, which we believe will depend 
in part on energy segment earnings recovery. We estimate Gavilon's ratio of 
adjusted debt to EBITDA may exceed 4.5x in the coming quarters compared with a 
ratio of 4.2x for the 12 months ended June 30, 2012. This ratio range is 
commensurate with indicative ratios for an aggressive financial risk profile, 
which include debt to EBITDA of 4x-5x. (As with other agribusiness companies, 
we net a portion of Gavilon's readily marketable grain inventories against its 
short-term borrowings when calculating credit measures.) 

Liquidity
We have revised Gavilon's liquidity descriptor to adequate from less than 
adequate, primarily reflecting improved EBITDA cushion on its maximum 
debt-to-EBITDA covenant to above 15% over the next year as a result of this 
amendment. Our view of liquidity also incorporates the following expectations:

     -- We expect liquidity sources (including cash, funds from operations, 
and revolving credit facility availability) will cover expected cash uses by 
more than 1.2x over the next year.
     -- Although we expect the company's working capital requirements to 
result in negligible free cash flow generation over the next 12 months, we 
expect liquidity sources will continue to exceed uses, even if EBITDA were to 
decline by 50%, which we have stressed to reflect the volatile characteristics 
of the company's merchandising and trading operations.
     -- In our view, the company has generally prudent financial risk 
management.
     -- The company has sound relationships with its banks.

Estimated annual cash sources of about $275 million in funds from operations 
and additional revolving credit facility borrowing capacity should adequately 
cover Gavilon's annual debt amortization payments of about $80 million, 
stressed working capital uses of more than $500 million, annual capital 
expenditures of about $80 million, and any unforeseen liquidity events related 
to the company's commodity trading businesses.

CreditWatch
Standard & Poor's will seek to resolve the CreditWatch listing when more 
information about Marubeni's acquisition financing plans become available and 
when regulatory hurdles are met, making the likelihood of the acquisition more 
certain. 

Related Criteria And Research
     -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
     -- Methodology And Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011
     -- Key Credit Factors: Criteria For Rating The Global Branded Nondurable 
Consumer Products Industry, April 28, 2011
     -- Use Of CreditWatch And Outlooks, Sept. 14, 2009
     -- Standard & Poor's Ratings--And Their Role In the Financial Markets, 
April 15, 2008

Ratings List
Ratings Remain On CreditWatch
The Gavilon Group LLC
 Corporate credit rating         BB/Watch Pos/--
 Senior secured
  $775 mil. term loan due 2016   BB+/Watch Pos
    Recovery rating              2

The Gavilon Group LLC
Gavilon Grain LLC
Gavilon Fertilizer LLC
Gavilon LLC
 Senior secured
  $2.75 bil. revolver due 2013   BBB-/Watch Pos
    Recovery rating              1


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