Fitch Ratings affirmed Cargill Incorporated's Long-Term Issuer Default Rating (IDR) at 'A'. Fitch also affirmed all of the debt ratings for Cargill and Cargill Global Funding PLC including the Short-Term IDR at 'F1'.
The Rating Outlook is Stable.
Cargill's ratings reflect its strong business profile, supported by the substantial scale of its diverse agricultural operations geographically, logistically and across key commodities, which is underpinned by a robust risk-management framework. Cargill benefits from good operating momentum reflecting strong demand, tight commodity supplies and a good margin environment across its business segments. Fitch projects EBITDA after associates and minorities in the upper $10 billion range for fiscal 2023 compared to $11.7 billion in fiscal 2022.
Cargill's financial profile is also strongly supported by abundant liquidity, reflecting robust cash, significant availability under committed credit lines and liquid readily marketable inventories (RMI). Fitch expects leverage (RMI-adjusted total debt to EBITDA) metrics to remain strong at less than 1.0x in fiscal 2023.
Key Rating Drivers
Strong Recent Performance: Cargill's performance has been strong during the past two years with good operating momentum supported by strong demand for food, fuel, and feed. Given the tight commodity supply environment, this resulted in good profit generation and structurally higher margins for global agribusiness companies, including Cargill.
Supportive fundamentals include strong profitability in the beef business, reflecting favorable industry operating fundamentals despite pandemic-related slowdowns. Other supportive factors include a strong crush margin environment given growing renewable green diesel demand. With higher earnings across all four segments, EBITDA after associates and minorities, based on Fitch's adjustments, was about $11.7 billion in fiscal 2022 (ended in May) with the Animal Nutrition and Protein segment generating more than 50% of Cargill's EBITDA. This compares with $9.2 billion in fiscal 2021 and $6.5 billion in fiscal 2020.
FY 2023/2024 Expectations: Fitch believes Cargill can effectively manage increased economic uncertainty and ongoing geopolitical risks by leveraging its significant diversification geographically, logistically and across key commodities along with effective risk management and abundant liquidity to adapt to evolving global trade flows. With solid operating momentum expected to continue supported by good near-term demand and tight supply/demand fundamentals combined with normalizing margins in its beef segment, Fitch projects EBITDA after associates and minorities in the upper $10 billion range in fiscal 2023.
Fitch's forecast assumes elevated commodity prices and higher inflation could result in slowing demand particularly in a sustained inflationary environment along with a tempering of the margin environment over the medium term. Fitch projects EBITDA after associates and minorities could decline to the low to mid-$10 billion range for fiscal 2024.
Substantial Scale, Operational Diversification: Cargill is the largest U.S.-based agricultural company and one of the world's biggest privately-owned companies, with significant product and geographical diversification that materially benefits its business profile. Fitch believes the company's scale, product diversification and extensive geographic presence, spanning nearly all agricultural commodities, give Cargill a clear advantage versus its competition.
Abundant Liquidity Sources: The diversified sources of external liquidity that support the CP program and short-term working capital financing combined with cash, short-term marketable securities and high liquid RMI provide Cargill with substantial financial flexibility. Fitch views the company's abundant liquidity as particularly important given periods of earnings volatility associated with agricultural cycles, as Cargill mitigates financial risk from higher gross debt balances when working capital needs increase.
Fitch expects Cargill will maintain significant sources of external and internal liquidity for use in financing its operations worldwide, including cash, FCF and external committed facilities, supported by more than $7.0 billion in total committed credit facilities.
Medium-term Leverage Around 1x: Fitch expects leverage to be below 1.0x in fiscal 2023, reflecting strong EBITDA generation. This compares to leverage of 0.5x in fiscal 2022 and 0.5x in fiscal 2021. Over the medium-term, Fitch expects leverage around 1x.
Balanced Capital Allocation Strategy: Fitch views Cargill's capital allocation as disciplined, with the company focused on making organic investments and generally pursuing bolt-on acquisitions; targeting an expanded geographic reach, particularly in Asia; increased exposure to the health ingredients, seafood, bio-industrial and protein sectors; and increased technology capabilities. Fitch's forecast incorporates M&A of more than $3 billion in fiscal 2023, which includes the completion of its 50/50 joint-venture investment in Wayne-Sanderson Farms (closed July 2022) and acquisition of Equus UK TopCo LTD, Croda's performance-technologies bio-based industrial business (closed June 2022), and then averaging around $1 billion annually thereafter.
Given good growth opportunities within the agricultural sector, Fitch expects increased organic investments over the forecast period focusing on new greenfield operations that increase geographic reach and scale particularly in renewable fuels, capacity/debottlenecking projects, supply chain improvements, products and technology capabilities, including automation. Fitch's forecast also assumes dividends and share repurchases will be consistent with Cargill's long-term financial policy.
Other Operating Environment Factors: Fitch's ratings for agricultural processors take a through-the-cycle view on credit-protection measures and profitability, as operating earnings can be pressured or debt levels can rise. Fitch currently views Cargill as having significant operating flexibility, reflecting its strong business and financial profiles.
Cargill and other agricultural processors are subject to commodity price variations affected by a wide range of unpredictable macroenvironmental conditions, including weather, crop disease outbreaks, export taxes and retaliatory tariffs. The company can also be exposed to pricing swings in agricultural commodities stemming from periodic supply/demand imbalances, inflationary cycles and timing of cash payments or foreign exchange movements.
Derivation Summary
Cargill's 'A' rating reflects its strong business profile, supported by the substantial scale of its operations as the largest agricultural company based in the U.S., with significant diversification geographically, logistically and across key commodities. Cargill's financial profile is strongly supported by abundant liquidity, reflecting robust cash, cash equivalents and short-term investments; significant availability under committed credit lines; and liquid RMI. Fitch expects leverage to be less than 1.0x in fiscal 2023, reflecting good operating fundamentals across multiple business segments.
Cargill's ratings are higher than Bunge Limited's 'BBB'/Positive. Fitch views Cargill's business and financial risk profile as considerably stronger than Bunge's due to its larger operational scale and greater product diversification across segments.
Bunge's 'BBB' rating reflects the scale of its global agribusiness and food ingredient businesses focused on the handling and processing of agricultural commodities with a leading position in oilseeds operations that represents more than half of the agribusiness earnings. Fitch's expects that structural shifts, which are supported by current favorable market conditions, along with an improved operating model, could support sustained EBITDA in the mid-$2 billion range. Fitch projects Bunge's RMI-adjusted leverage will be less than 1x in 2022 and remains below 2x range over the forecast.
Cargill's business profile is similar to that of Archer Daniels Midland Company (ADM; A/Stable). ADM is one of the largest global agribusiness firms, with significant product and geographic diversification supported by its core operations, which include processing assets for oilseeds and numerous other agricultural commodities, crop origination services, carbohydrate solutions and the fastest-growing of the above businesses, nutrition.
ADM's 'A' rating reflects its strong business profile, which is supported by the company's scale, and the operational and geographical diversity of the firm's agricultural commodity operations. ADM's performance has been strong in 2022 with EBITDA after associates and minorities expected in the upper $5 billion range compared to $4.6 billion in 2021. Leverage is expected below 1x for 2022.
For credit purposes, Fitch considers RMI-adjusted leverage when evaluating agricultural processors and calculates RMI-adjusted leverage by first subtracting the structural inventory required to operate a downstream processing facility on a steady-state basis. This inventory is generally not readily available for liquidation purposes with a going-concern entity. An additional 10% discount is taken for the remaining merchandisable inventory to account for potential basis risk loss.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
With solid operating momentum expected to continue supported by good near-term demand and tight supply/demand fundamentals, Fitch projects EBITDA after associates and minorities in the upper $10 billion range in fiscal 2023 driven by normalizing margins in its beef segment;
In fiscal 2024, the forecast assumes EBITDA after associates and minorities moderating to the low to mid-$10 billion range as elevated commodity prices and higher inflation could result in slowing demand particularly in a sustained inflationary environment along with a tempering of the margin environment over the medium term;
Capital spending in the low-to-mid-$3 billion range;
RMI levels remain higher given elevated commodity prices;
Normal cadence of dividend and share purchases in line with financial policies;
Underlying FCF in excess of $3 billion, which excludes the combined effects of swings in working capital and financial services;
Leverage below 1.0x in fiscal 2023. Over the medium-term, Fitch expects leverage around 1x absent any transformative M&A.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:--Structural shifts or further diversification of core operations that leads to lower volatility in operating earnings and higher FCF, with FCF margin sustained in the 2%-3% range;
Commitment to sustaining long-term RMI-adjusted leverage below 1.0x.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
RMI-adjusted leverage sustained above mid-1x, driven by EBITDA compression or meaningfully higher debt levels, most likely from a sizable acquisition, changing macro-environmental conditions or an increase in working capital;
Adoption of a more aggressive financial policy;
Lack of FCF generation lasting over multiple crop seasons.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Abundant Liquidity: Cargill has abundant liquidity, supported by approximately $7.6 billion in cash and short-term investments, and significant availability in committed U.S. and international credit facilities as of Aug. 31, 2022, with over $7.0 billion in total committed credit facilities, including $5 billion that backstops its CP and industrial revenue bond (IRB) programs.
Cargill's credit facilities consist of a $1.5 billion, 364-day facility maturing in October 2023, a $4.5 billion, five-year facility maturing in October 2026, a $600 million, 364-day facility maturing in April 2023 and a $500 million, bilateral committed facility in Singapore maturing June 2023. During the first quarter 2023, Cargill entered into a new 20 billion ruble committed facility in Russia with a maturity date of February 2024.
As of Aug. 31, 2022, Cargill had $300 million CP borrowings outstanding, and IRBs backed by the facilities totaled $746 million. Long-term debt maturities are manageable and include $500 million and EUR500 million in fiscal 2023 and approximately $1.3 billion in fiscal 2024, which Fitch expects will be refinanced.
Issuer Profile
Cargill is the largest U.S.-based agricultural company and one of the world's biggest privately-owned companies with significant product and geographical diversification. Cargill's key business segments include: Animal Nutrition & Protein, Origination & Processing, Food Ingredients & Applications and Industrial & Financial Services.
Summary of Financial Adjustments
Add-backs to total debt include obligations related to Cargill's accounts receivable factoring program and guarantees related to third parties and nonconsolidated subsidiaries;
Cash distribution received from and/or paid to affiliates is reflected in leverage metrics;
Reported RMI is reduced by determining the structural level of processing RMI required that supports Cargill's processing facilities, along with a discretionary 10% of the remaining RMI to determine adjusted RMI available for credit purposes.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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