Fitch Affirms Monsanto's IDRs at 'A+/F1'; Outlook Stable

Wed Jun 12, 2013 10:46am EDT

(The following statement was released by the rating agency) CHICAGO, June 12 (Fitch) Fitch Ratings has affirmed the long-term Issuer Default Rating (IDR), revolving credit facility rating and senior unsecured note ratings of Monsanto Company (Monsanto) at 'A+'. Fitch has also affirmed Monsanto's short-term IDR and commercial paper rating at 'F1'. The Rating Outlook is Stable. See the full list of rating actions at the end of this release. KEY RATING DRIVERS The ratings reflect Monsanto's substantive market positions in corn, soybean, cotton and vegetables seeds and traits; leading or sizeable positions depending on crop and geography. The company has R&D-driven expertise in plant biotechnology that enables high profit margin and strong cash flows. The company's portfolio benefits from patent protection for most of its key products which creates high barriers of entry for new market entrants. In addition, Monsanto licenses its technologies and traits to its competitors. These agreements generate a recurring royalty stream that further supports the company's profitability. Monsanto's credit profile is strong. The company generated $4.4 billion of operating EBITDA in the latest 12 months (LTM) to Feb. 28, 2013, corresponding to 30% of net sales. LTM free cash flow was approximately $1.8 billion. Gross balance sheet debt-to-EBITDA leverage stood at 0.5x. Net debt was negative $2.2 billion including $4.4 billion of cash and cash equivalents and $310 million of short-term marketable securities. Monsanto's operating profits are driven by its corn seeds and traits which accounted for over half of the company's gross profits in fiscal 2012. With corn prices well above historical averages, farmers are planning to plant a record number of acres of corn, according to the USDA, which requires greater volume of seeds. Higher corn prices are also improving farm economics, which enables more farmers to buy newer generation seed and traits. These are higher margin sales for Monsanto which is evident as the company's margins have been increasing. Fitch believes the company's litigation risk has decreased recently. In May, the U.S. Supreme Court ruled unanimously for the company in the Bowman case. Where U.S. patent law is emulated around the world, this decision will prompt other jurisdictions to similarly uphold trait patents. Fitch also believes that cases brought by Monsanto will be quicker to litigate as a function of this decision. This could eventually translate into litigation cost savings. In March, Monsanto settled its countering legal claims with E.I. DuPont de Nemours and Company (DuPont). DuPont will be given relief from a $1 billion jury verdict finding they violated a contract with Monsanto that prohibited the stacking of Monsanto's RoundUp Ready trait with another glyphosate resistant trait. In turn, DuPont will drop its antitrust claims against Monsanto. Additionally, Monsanto and DuPont entered into a cross-licensing agreement, granting each other access to various patented traits. The finding of RoundUp Ready wheat in Oregon this year may expose the company to damage claims but the investigation into the source of the glyphosate resistant wheat is ongoing. Monsanto ended its field trials of RoundUp Ready wheat in 2005. The rating is somewhat constrained by the company's growth-through-acquisition strategy and its sizeable dividends and share buyback program. Since 2007, Monsanto completed multiple acquisitions for an aggregated amount of roughly $3 billion to broaden its product portfolio into cotton, vegetables and other seeds and to expand its geographical footprint. Shareholder-friendly actions included $722 million dividends paid in the LTM period ended Feb. 28, 2013. Dividends have been growing quickly and are expected to continue to grow. The company's board approved a 25% increase in the dividend per share in August 2012. The company's reported $259 million of share buybacks net of proceeds from stock option exercises LTM to Feb 28, 2013 is not large but are expected to grow. The Board of Directors recently approved a new $2 billion three-year share repurchase program to commence July 1, 2013. Monsanto has an existing $1 billion program started in January 2013 (authorized in June 2012, effective July 1, 2012). The Stable Outlook is based on robust operating performance and expectations for continued sales and earnings growth. In the first half of the company's fiscal 2013, sales grew 17% to approximately $8.4 billion and gross profits increased to $4.5 billion or 53% of sales. The company's liquidity totaled approximately $6.8 billion at Feb. 28, 2013, based on the company's undrawn $2 billion revolving credit facility, cash and cash equivalents and short-term marketable securities. Monsanto's facility expires in April 2016 and requires the company to maintain a total debt to total capital ratio of less than 66 2/3%. Monsanto has significant headroom under the covenant as Fitch calculates the company's total debt-to-total capital is 14% at Feb. 28, 2013. Monsanto's next maturity is $300 million of 2 3/4% notes due 2016, making their maturity schedule very manageable. Fitch expects Monsanto to continue to generate substantial positive free cash flow in most fiscal years and to maintain a strong credit profile appropriate for an R&D-driven company. RATING SENSITIVITIES Positive: Future developments that may, individually or collectively, lead to positive rating action include: --Meaningful product diversification beyond seeds and traits and agricultural productivity; --Substantially increased earnings contribution from outside North America. Negative: Future developments that may, individually or collectively, lead to negative rating action include: --Significant deterioration of credit metrics following potential sizeable M&A; --Substantial dividends or share buyback payouts that are debt-financed; --Regulatory actions that threaten Monsanto's business model. Fitch affirms Monsanto's ratings as follows: --Long-term IDR at 'A+'; --Senior unsecured revolving credit facility at 'A+'; --Senior unsecured debt at 'A+'; --Short-term IDR at 'F1'; --Commercial Paper at 'F1'. The Rating Outlook is Stable. Contact: Primary Analyst Christopher M. Collins, CFA Director +1-312-368-3196 Fitch Ratings, Inc. 70 West Madison Street Chicago, IL 60602 Secondary Analyst Monica M. Bonar Senior Director +1-212-908-0579 Committee Chairperson Sean T. Sexton, CFA Managing Director +1-312-368-3130 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (Aug. 8, 2012); --'Rating Chemical Companies' (Aug. 9, 2012). Applicable Criteria and Related Research: Rating Chemical Companies here Corporate Rating Methodology here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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