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 (CP) rating at 'F2'. A complete list of rating actions follows at the end of this release.
The Rating Outlook is Stable.
KEY RATING DRIVERS
Company Profile. The ratings reflect Monsanto's substantive market positions in corn, soybean, cotton and vegetables seeds and traits, and crop protection products. The company has R&D-driven expertise in plant biotechnology and breeding that enables high profit margins 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 operating profits are driven by its corn seeds and traits which accounted for about 46% of FY 2014 gross profits. Corn planting in the U.S. is expected to be lower in 2015 than in 2014 given high stores and low prices, but soybean planting should benefit and Fitch expects overall 2015 operating profits to be flat with 2014.
Strong Profitability and Free Cash Flow. The company generated $4.8 billion of operating EBITDA in the LTM period ended Nov. 30, 2014, representing 30% of net sales. Over the same period, operating cash flow after dividends and capital expenditures but before acquisitions (FCF) was approximately $738 million. The company guides to FY 2015 free cash flow (defined as the total of cash flows from operating activities and investing activities) of $2 billion to $2.2 billion and Fitch believes FY 2015 FCF will be at least $1.3 billion.
Moderate Financial Leverage. Pro forma for the $365 million notes to be issued in January 2015, total debt/operating EBITDA for the period was 1.7x. Fitch expects financial leverage to remain at or below 2x on a gross basis, which is consistent with Monsanto's net debt/EBITDA target of 1.5x.
The rating is constrained by the company's share buyback program and sizeable dividends. As of Nov. 30, 2014, Monsanto had about $4.6 billion remaining under the June 2014, $10 billion, two-year share repurchase program. Fitch expects Monsanto to balance share repurchases with investment opportunities to retain its target capital structure of 1.5x net debt/EBITDA.
Solid Liquidity. Fitch notes that the November quarter is a seasonal working-capital use but FCF positive quarter. The company's liquidity totaled approximately $5.6 billion at Nov. 30, 2014 with available cash at $3.1 billion and full availability under the company's $2.5 billion revolving credit facility due April 2016. As of Nov. 30, 2014, CP outstanding was $395 million, accrued marketing programs were $952 million and deferred revenues were $2.5 billion. The revolver has a total debt-to-total capital covenant of less than 66 2/3% compared to the Nov. 30, 2014 ratio of 52%. Fitch expects the company to remain in compliance. Estimated maturities of long-term debt over the medium term are $300 million in FY 2016, $900 million in FY 2017, $300 million in FY 2018 and $800 million in FY 2019.
The Stable Outlook is based on robust operating performance and expectations for long-term sales and earnings growth. Fitch expects Monsanto to continue to generate substantial positive FCF 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:
--Total Debt/EBITDA declines on a sustained basis below 1.25x.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
--Total Debt/EBITDA increases on a sustained basis above 2.25x;
--Liquidity, of which cash is at least $2 billion, falls to less than $3 billion;
--Regulatory actions occur that threaten Monsanto's business model.
Fitch affirms Monsanto as follows:
--Long-term IDR at 'A-';
--Senior unsecured revolving credit facility at'A-';
--Senior unsecured debt at'A-';
--Short-term IDR at 'F2';
--Commercial Paper at 'F2'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 2014);
--'North American Chemicals 2015 Outlook' (December 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=978772
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. 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.
