Fitch Expects to Rate Monsanto's Proposed Notes 'A+'; Outlook Stable

CHICAGO, Nov 04, 2013 (BUSINESS WIRE) -- Fitch Ratings expects to assign an 'A+' rating to Monsanto Company's (Monsanto) proposed $1 billion notes with tenors of three, five and 30 years. The Rating Outlook is Stable. A full list of ratings is provided at the end of the release.

THE NOTES

The notes will be senior unsecured obligations and will rank equally with the company's $2.1 billion of debt as of Aug. 31, 2013. Monsanto plans to use the net proceeds to repay commercial paper used to fund its $930 million acquisition of The Climate Corp. and any remaining proceeds for general corporate purposes. The notes are being issued under the company's indenture dated Aug. 1, 2002. Key covenants include restrictions on secured debt, sale and leaseback transactions, and mergers and asset sales. There are no financial covenants. The notes will have make whole call provisions. The notes also feature a put option upon a change of control and a downgrade of the notes below investment grade.

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, marked by robust operating margins, significant free cash flow, low leverage and large cash balances. The company generated $4.3 billion of operating EBITDA in fiscal 2013 ended Aug. 31, 2013, corresponding to 29% of net sales. Fiscal 2013 free cash flow was approximately $1.2 billion. Gross balance sheet debt-to-EBITDA leverage stood at 0.5x. Following the issuance of the proposed notes, gross leverage will remain low at 0.7x. Fiscal year end 2013 net debt was negative $1.6 billion given $3.7 billion of cash and cash equivalents. On a pro forma basis accounting for the issuance, net debt would be negative $0.6 billion.

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.

Monsanto's operating profits are driven by its corn seeds and traits which accounted for over half of the company's gross profits again in fiscal 2013. Farm economics are very healthy, which enables more farmers to buy newer generation seed and traits. Corn planting in the U.S. may be lower in 2014 than in 2013 due to lower corn prices, but Fitch expects Monsanto's corn seeds and traits gross profits to grow due to U.S. farmer demand for new seeds and traits and growing hybrid corn planting in South America.

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 $4 billion, including the recently completed The Climate Corp. acquisition, to broaden its product portfolio into cotton, vegetables and other seeds, expand its geographical footprint and enhance service offerings to farmers.

Shareholder-friendly actions included $802 million dividends paid in fiscal 2013. Dividends have been growing quickly and are expected to continue to grow. The company's board approved an almost 15% increase in the dividend per share in August 2013. The company's reported $838 million of share buybacks net of proceeds from stock option exercises in fiscal 2013 and also are expected to grow. Monsanto commenced a $2 billion three-year share repurchase program on Aug. 20, 2013, after exhausting a previous $1 billion program that commenced Jan. 14, 2013. At Aug. 31, 2013, Monsanto had bought $30 million of shares under its share repurchase program.

The Stable Outlook is based on robust operating performance and expectations for continued sales and earnings growth. In the company's fiscal 2013, sales grew 10% year over year to approximately $14.9 billion and gross profits increased to $7.7 billion from $7 billion a year earlier, accounting for 51% of sales.

The company's liquidity totaled approximately $5.9 billion at Aug. 31, 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 was 14% at Aug. 31, 2013. Monsanto's next maturity is $300 million of 2 3/4% notes due 2016, making their maturity schedule very manageable.

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 currently rates Monsanto as follows:

--Long-term Issuer Default Rating (IDR) 'A+';

--Senior unsecured revolving credit facility 'A+';

--Senior unsecured debt 'A+';

--Short-term IDR 'F1';

--Commercial Paper 'F1'.

The Rating Outlook is Stable.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (August 2013);

--'Rating Chemical Companies' (August 2012).

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=715139

Rating Chemical Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682313

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=806971

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.

SOURCE: Fitch Ratings

        
        Fitch Ratings 
        Primary Analyst 
        Christopher M. Collins, CFA 
        Director 
        +1-312-368-3196 
        Fitch Ratings, Inc. 
        70 West Madison Street 
        Chicago, IL 60602 
        or 
        Secondary Analyst 
        Monica M. Bonar 
        Senior Director 
        +1-212-908-0579 
        or 
        Committee Chairperson 
        Sean T. Sexton, CFA 
        Managing Director 
        +1-312-368-3130 
        or 
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        brian.bertsch@fitchratings.com
        

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