-- We believe Archer Daniels Midland Co.'s (ADM's) earnings may be
weaker in the remainder of 2012 because of a smaller U.S. corn and soybean
harvest, and the effect that may have on the company's ethanol and grain
-- The company may continue its share repurchases despite the possibility
of soft earnings and higher priced grains.
-- We are affirming our ratings on ADM, including the 'A' long-term and
'A-1' short-term corporate credit ratings.
-- We are revising the outlook to negative from stable, reflecting the
risk of lower earnings and weaker adjusted credit measures over the next year.
On Aug. 3, 2012, Standard & Poor's Ratings Services affirmed its ratings on
Decatur, Ill.-based food processing company Archer Daniels Midland Co. (ADM),
including the 'A' long-term and 'A-1' short-term corporate credit ratings, and
revised the outlook to negative from stable.
ADM reported about $10.3 billion in balance sheet debt as of its fiscal year
ended June 30, 2012.
The outlook revision to negative reflects our belief that earnings and credit
measures may weaken over the next year, given the current drought across the
majority of the U.S. farm belt. The drought could also result in lower volumes
for the company's ethanol facilities (which are currently not profitable),
possibly leading to an extended period of weak earnings in that business. And
the company's grain handling volume may suffer, resulting in lower
merchandising and handling segment earnings.
Although the company's fiscal year-end (June 30, 2012) credit measures
continue to be in line with our expectations, we believe they may weaken over
the next 12 to 18 months based on our earnings outlook and the possibility for
higher long-term debt balances from higher working capital requirements. We
estimate the ratio of inventory-adjusted debt to EBITDA was about 2.5x and
funds from operations (FFO) to adjusted debt was about 35% at fiscal year-end
2012. (Outstanding short-term working capital borrowings are offset by a
portion of the company's readily marketable grain inventories (RMI).) These
numbers were only modestly weaker than the fiscal 2011 ratios of 2.2x and 37%,
respectively, and are within the indicative ratio range for the company's
"intermediate" financial risk profile, which include leverage of 2x-3x and FFO
to debt of 30%-45%. However, we believe they may weaken to closer to 3x and
below 30%, respectively, over the next 12 to 18 months.
We also believe the company may continue with share repurchases despite the
possibility of weaker earnings. ADM has publicly stated it intends to buy back
shares as part of a plan to mitigate the impact of the dilution related to its
June 2011 equity unit conversion, when the company issued 44 million shares of
equity. Although the company has indicated it will adjust the pace of the
buybacks in order to manage near-term working capital needs and leverage, the
buybacks could still cost about $400 million over the next 12 to 18 months, a
period when free cash outflow could be more than $1.5 billion.
Operating performance for fiscal 2012 was weaker than we expected, with
estimated EBITDA falling by about 17% year over year. The decline largely
reflects lower pretax earnings in ADM's oilseed processing segment (albeit
stabilizing in the fourth quarter), losses in its corn processing segment due
to the weak ethanol market, and lower merchandising and handling earnings. We
currently expect EBITDA to further decline by about 5% year over year through
June 30, 2013, reflecting the following assumptions:
-- Weak ethanol margins at least through the end of calendar 2012 offset
a modest rebound in oilseed processing.
-- Merchandising and handling earnings remain well below the company's
$600 million to $800 million normalized range, given the expectations for a
smaller corn corp.
-- Free cash outflows of at least $1.5 billion reflecting higher corn
prices (December 2012 corn futures are currently trading at about $7.90 per
The ratings on ADM reflect our opinion that the company has a "strong"
business risk profile and "intermediate" financial risk profile. Key credit
factors in our assessment of the company's business risk profile include its
global market positions in agribusiness, its track record in mitigating
earnings volatility, and its improving geographic diversity.
ADM is one of the world's leading agribusiness companies, with major market
positions in oilseed processing, corn milling, and ethanol production. The
company is also a leader in the production of biodiesel, soy meal, flour, and
other value-added food and feed ingredients. Moreover, the company's various
operating segments are in themselves quite broad, and cover, among other
things, soybean crushing, peanuts, cotton, corn sweeteners, starches, and
ethanol. Although ADM participates in the challenging agribusiness industry,
which is characterized by volatility in commodity prices, we believe
management's ongoing capital investments in its core business lines will
generate meaningful earnings growth over the long-term and increase geographic
diversity, thus helping offset earnings volatility. Moreover, cash flow
generation tends to be countercyclical, and ADM is able to mitigate periods of
weaker earning performance thanks to its liquidity.
We believe ADM has "strong" liquidity. In all likelihood the company will
continue to proactively manage its projected cash needs to ensure sufficient
funding sources are in place to meet projected working capital requirements,
particularly over the next 12 to 18 months, when the commodity cycle will
probably continue to be highly inflationary.
Our view of the company's liquidity incorporates the following expectations:
We expect liquidity sources (including cash, discretionary cash flow, and
revolving credit availability) to exceed uses by 1.5x over the next year.
We expect liquidity sources to continue to exceed uses, even if EBITDA were to
decline by 30%.
We believe the company has an ample equity buffer (about $18 billion net of
goodwill as of March 31, 2012) to maintain compliance with its minimal
tangible net worth covenant of $5.8 billion.
We believe ADM has well-established, solid relationships with its banks and a
generally high standing in the credit markets.
In our assessment, the company has generally very prudent financial risk
management, such that management would proactively ensure continued strong
liquidity and be able to anticipate setbacks.
ADM has $4.3 billion of committed borrowing capacity backing its commercial
paper program. The company had commercial paper outstanding of $1.3 billion as
of June 30, 2012, and unused borrowing capacity of $4.4 billion. The company
has a $1.4 billion floating-rate note due in August 2012, and we believe the
company will either repay or refinance the note with available liquidity. If
the company refinances this facility with long-term debt, our credit measures
for the company would weaken.
Cash sources include readily available cash of at least $500 million, more
than $3 billion of available committed borrowing capacity under the company's
revolving credit facilities, and annual FFO of more than $2 billion. We
believe these, together with RMI, are strong enough to cover the company's
capital expenditures of more than $1.5 billion, share repurchases of about
$400 million, and unforeseen trading or counterparty losses in its grain
merchandising and handling operations.
The negative outlook reflects our opinion that earnings and resultant credit
measures may weaken over the next year, during which time the company may
elect to continue repurchasing equity. We factor earnings volatility into the
ratings, and had expected three-year average leverage to remain between 2.0x
to 2.5x, given the company's expected ongoing share repurchase activity. We
now believe weak earnings in ethanol (given current corn prices of about $8
bushel) and the merchandising and handling segment may weaken the company's
adjusted debt to EBITDA and FFO to debt ratios to closer to 3x and below 30%,
respectively, over the next 12 to 18 months.
We would consider a lower rating if the company's earnings do not improve, or
if its credit measures weaken such that it sustains an adjusted debt to EBITDA
of more than 3x and an FFO to debt ratio of 25% over several quarters. We
believe this could occur if weaker ethanol and merchandising and handling
earnings extend well into calendar 2013 while long-term debt balances
increase. If we lower the corporate credit rating, we would also lower the
current 'A-1' short-term commercial paper rating to 'A-2'.
We would consider revising the outlook to stable if ADM improves its operating
performance and sustains adjusted debt to EBITDA at about 2.5x and FFO to
total debt at greater than 30%. We would also consider revising the outlook to
stable if the company demonstrates a more conservative financial policy,
including curtailed share repurchase activity during weak earnings and/or cash
flow cycles, and working capital needs are financed with short-term facilities
in order to sustain these credit measures given our RMI adjustment.
Related Criteria And Research
-- Methodology And Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Sept. 28, 2011
-- Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- Standard & Poor's Ratings--And Their Role In The Financial Markets,
April 15, 2008
-- Our Rating Process, April 15, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
Ratings affirmed; Outlook revised
Archer Daniels Midland Co.
Corporate credit rating A/Negative/A-1 A/Stable/A-1
Archer Daniels Midland Co.
Senior unsecured A
Commercial paper A-1