Decatur / IL. (fr) Fitch Ratings has affirmed Archer Daniels Midland Company (ADM) ratings as follows: Long-term Issuer Default Rating (IDR) at «A»; Senior unsecured debt at «A»; Convertible notes at «A»; Credit facilities at «A»; Short-term IDR at «F1»; Commercial paper (CP) at «F1». The Rating Outlook is Stable.
ADM´s credit ratings are supported by its leading position in agricultural processing and merchandising, as well as its position as a leading player in bio-energy. The company´s competitive advantages include its size, scale and diversification, along with its extensive vertically integrated origination, processing and logistics network. ADM´s strong liquidity is a key ratings factor due to the inherent earnings volatility associated with agricultural markets and the working capital requirement to fund commodity inventories. Changes in global supply and demand periodically lead to significant swings in commodity prices and correspondingly, ADM´s earnings and cash flow. However, diversification partially mitigates the impact of this volatility.
At March 31, 2012, ADM´s cash plus short-term marketable securities were 1,2 billion USD and readily marketable inventory (RMI) was 7,9 billion USD after Fitch´s discretionary ten percent haircut. RMI is hedged and highly liquid. In addition, ADM has 4,3 billion USD of undrawn committed credit facilities that support its CP program, against which 1,2 billion USD of CP was outstanding. The company also has a one billion USD off-balance-sheet accounts receivable securitization program which was fully utilized at the most recent quarter end. ADM plans to renew this program prior to its expiration on June 29, 2012.
Continued volatility in agricultural commodity prices is likely since ending stocks remain relatively tight and long-term global demand is growing. Ample liquidity is expected to support ADM´s ratings through periodic earnings volatility and heightened working capital usage. ADM´s total debt with equity credit was 10,3 billion USD at March 31, 2012, approximately flat with the heightened debt level at June 30, 2011. Upcoming maturities of long-term debt primarily consist of 1,5 billion USD floating rate notes due in August 2012 and 1,15 billion USD face amount of convertible senior notes due in February 2014.
In addition to evaluating traditional leverage measures, Fitch´s analysis of agricultural commodity processors takes into consideration leverage ratios that exclude debt used to finance RMI. Total debt to operating Ebitda, adjusted for RMI, was 0,8 times (x) for the latest twelve months ended March 31, 2012. On an unadjusted basis, total debt to operating Ebitda was 3,2x and funds from operations adjusted leverage was 5,2x for the same period. Unadjusted leverage is high for the rating level, primarily reflecting heightened commodity prices. However, the company could see some improvement in gross leverage with seasonally lower volume improving working capital in the near term.
Free cash flow (FCF, cash flow from operations less capital expenditures and dividends) for the nine-month period ended March 31, 2012, was 726 million USD, a significant recovery from negative 6,2 billion USD in the prior year period which was impacted largely by working capital usage due to higher agricultural commodity prices and inventories. Year-to-date FCF benefited from 1,0 billion USD of assets de-recognized from ADM´s balance sheet when trade receivables were sold through the company´s accounts receivable securitization program.
Factoring in heightened and volatile agricultural commodity prices, a further climb in prices could lead to negative FCF due to working capital usage. If FCF reverts to negative for longer than twelve to 18 months, Fitch expects ADM to use additional sources of equity capital or proceeds from the sale of non-core assets to finance a portion of its working capital needs. On the contrary, if commodity prices recede, ADM could benefit from reduction in working capital becoming a greater source of funds.
Year-to-date capital expenditures have ramped up again to 1,2 billion USD, after moderating somewhat to 913 million USD in the prior year period. The company also plans to engage in acquisitions both large and small. However, Fitch expects ADM to be prudent with that strategy while unadjusted debt remains elevated. Year-to-date acquisitions of 239 million USD were modest and approximately in line with the prior year period.
ADM´s net sales and other operating income rose 15 percent to 66,4 billion USD during the nine months ended March 31, 2012, versus the prior year period, primarily due to higher prices and also as a result of increased volume. Reported earnings before income taxes fell 40 percent to 1,3 billion USD from very strong results in the year ago period due to 437 million USD impairment, restructuring and other charges (including a 349 million USD impairment on ADM´s bio plastics joint venture), weak global oilseed crush margins, particularly in Europe, higher net corn costs and reduced ethanol margins as industry production exceeded demand. On the positive side, U.S. sweetener exports to Mexico remained strong and the industry achieved higher pricing on sweetener contracts in 2012. Excluding one-time items, earnings before taxes declined 20 percent to 1,8 billion USD.
Near-term margin pressure may continue, particularly in ethanol and oilseeds. However, Fitch expects ADM´s earnings are likely to improve in fiscal 2013 with the large U.S. crops currently expected to be processed and transported this fall. Lack of material improvement from recent earnings trends could lead to a Negative Outlook or rating action. A positive rating action is not anticipated in the near to intermediate term.
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