January 19 (Fitch) Neither Cargill, Inc.'s (Cargill) nor The Mosaic Company's (Mosaic) debt ratings are immediately affected by Cargill's decision to orderly dispose of its 64% equity stake, or 286 million common shares of Mosaic, according to Fitch Ratings. Cargill's ownership in Mosaic is worth $22 billion on Jan. 19, 2011. The value of Cargill's stake in Mosaic will fluctuate until the shares are sold. Cargill plans to exchange approximately 179 million Mosaic shares, or $13.6 billion (using Mosaic's closing share price of $76.15 on Jan. 19, 2011), with Cargill shareholders including the charitable trusts and foundation of Margaret A. Cargill, for all or part of their Cargill stock. Cargill plans to exchange the remaining 107 million Mosaic shares, or $8.1 billion, for new short-term debt owned by third parties. This exchange process is expected to occur over the next two years, so a portion of the proceeds will not be available in the first exchange. Fitch expects that the cash proceeds retained by Cargill will be utilized for short-term debt repayment, with the remainder to stay on the balance sheet for liquidity, acquisitions and/or future long-term debt repayment. A portion of the proceeds may be used in the near term to finance approximately $1.5 billion of acquisitions Cargill announced since September 2010 or repay short-term debt related to those transactions. Pursuant to a ruling from the U.S. Internal Revenue Service (IRS), the transaction is expected to be tax free for Cargill, Mosaic and their shareholders. It is subject to certain closing conditions including approval by the majority of Mosaic's minority shareholders and no withdrawal or adverse change to the IRS ruling.
Historically, Fitch had viewed Cargill's majority equity stake in Mosaic as a significant source of liquidity that enhanced its credit profile. The value of the Mosaic equity stake was seen as supportive to Cargill's credit profile, particularly during periods of operating earnings declines or high working capital usage. Although Cargill consolidated its 64% interest in Mosaic, Mosaic's debt is non-recourse to Cargill and not guaranteed by Cargill. Therefore, in addition to evaluating traditional credit metrics, Fitch had already excluded the non-recourse debt and related earnings (EBITDA) and interest expense of Mosaic for analytical purposes. Although the earnings generated from Mosaic were substantial to Cargill's consolidated earnings, the cash generated from Cargill's investment in Mosaic was limited to Mosaic's minimal dividend stream of $57 million per year, plus its $370 million share of a special dividend paid in December 2009.
For Mosaic's part, the day-to-day affairs of the company have been largely independent of Cargill's influence, and the change in ownership should be seamless. Outside pressures will likely build on Mosaic to return a portion of the company's $3.6 billion in cash to new Mosaic shareholders. Any prospective return of earnings is presumed normal course and not significant enough to detract from Mosaic's financial profile. Both companies are expected to benefit in upcoming quarters from good agricultural harvests (weather presumed accommodating), good farm economics and a growing worldwide demand for grains.
Cargill's ratings reflect its competitive position as the largest agricultural company based in the United States and one of the largest privately owned companies in the world. Its operations span every major country and almost every agricultural commodity. Key agricultural operations include oilseed processing, corn milling, meat processing, fertilizer production and animal nutrition. The ratings incorporate Cargill's extensive geographic and product line diversification, which lessens operating earnings volatility associated with the agricultural sector.
The ratings also factor in Cargill's liquidity, which is enhanced by readily marketable inventory (RMI) and substantial cash balances. Balancing out Cargill's credit strengths are the company's exposure to higher risk financial businesses; however, they have historically provided good diversification. Also, the company is susceptible to periodic negative free cash flow when commodity prices rise and working capital increases accordingly.
Cargill had total consolidated debt of $18.4 billion at Nov. 30, 2010. Excluding $1.3 billion of debt at Mosaic, Cargill's total debt was $17.1 billion, which is up $3.3 billion or 24% from May 31, 2010. The increase in debt is primarily due to heightened agricultural commodity prices.
Cargill's overall earnings improvement since the weak second half of fiscal 2009 is likely to continue with the global demand for agribusiness products escalating as economic recovery progresses. In the fiscal first half of 2011 ending Nov. 30, 2010, Cargill's revenues, excluding Mosaic, increased 7% to $54.1 billion from the prior year period. Consolidated net earnings excluding Mosaic rose 74% to $1.53 billion for the same period. Robust earnings growth was driven by origination, processing, trading and grain handling in core agricultural commodity businesses. Despite solid overall earnings growth, the Risk Management and Financial segment generated lower earnings than in the year ago period largely because of the energy business. Fitch anticipates that Cargill's consolidated fiscal 2011 earnings are likely to remain above 2010, and may even approach its peak earnings in fiscal 2008 if the second half of the year continues recent performance. Quarter-to-quarter earnings volatility is common for agribusiness companies. Thus, Fitch's ratings for agribusiness processors focus predominantly on annual results and the industry outlook for the near-to-medium term. Significant liquidity is required to maintain agricultural processors' ratings during periods of earnings weakness.
Cargill generated negative free cash flow (cash flow from operations less capital expenditures and dividends) for the latest 12-month (LTM) period ending Nov. 30, 2010, primarily reflecting the use of working capital as commodity prices have risen. Cargill's short-term borrowing needs have increased significantly to finance the working capital. Factoring in the fact that agricultural commodity prices remain elevated, free cash flow may remain negative in fiscal 2011. However, if agricultural commodity prices recede to more normalized levels, Cargill would benefit from working capital becoming a source of funds. Cargill's cash and short-term investments were $3 billion at Nov. 30, 2010, excluding Mosaic. Cargill's undrawn credit facilities provide backup liquidity to its commercial paper programs. Cargill has $5 billion of syndicated committed credit facilities that contain a minimum net worth covenant. Long-term debt maturities include approximately $400 million remaining in fiscal 2011, $533 million in fiscal 2012 and $3 billion in 2013.
In addition to evaluating traditional credit measures, Fitch makes several analytical adjustments for Cargill. Fitch's analysis of agricultural companies takes into consideration leverage ratios that exclude debt used to finance RMI. This commodity inventory is highly liquid and generally hedged. Similarly, interest expense on debt used to finance RMI is reclassified as cost of goods sold and thus is excluded from EBITDA and interest expense. With the RMI adjustments, Cargill's leverage (total debt to operating EBITDA) was 1.1 times (x) for the LTM ended Nov. 30, 2010, and EBITDA to gross interest expense was 18.1x. On an unadjusted basis, consolidated total debt to operating EBITDA was 2.2x and EBITDA/interest was 9.3x.
Cargill, Mosaic and their subsidiaries' ratings are as follows:
Cargill
--Long-term Issuer Default Rating (IDR) at 'A';
--Senior unsecured notes at 'A';
--Credit facility at 'A';
--Short-term IDR at 'F1';
--Commercial paper at 'F1'.
Cargill Ltd.
--Short-term IDR at 'F1';
--Commercial paper at 'F1'.
Cargill Global Funding PLC
--Short-term IDR at 'F1';
--Commercial paper at 'F1';
--Credit facility at 'A'.
Cargill Asia Pacific Treasury Ltd
--Short-term IDR at 'F1';
--Commercial paper at 'F1'.
The Mosaic Company
--IDR at 'BBB';
--Senior unsecured notes at 'BBB'.
Mosaic Global Holdings
--IDR at 'BBB';
--Senior unsecured notes and debentures at 'BBB'.
The Rating Outlooks are Stable.
Keywords: MARKETS RATINGS CARGILL
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