TEXT-S&P: Gavilon Group ratings remain on watch positive
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 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. 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