DBRS Confirms Cargill at A (high) and R-1 (middle), with a Stable Trend

DBRS has today confirmed the ratings of Cargill, Incorporated (Cargill or the Company) and Cargill Limited at A (high) and R-1 (middle). The trends remain Stable. The Company’s financial risk profile remains acceptable for the current rating, even though earnings are weaker as a result of poor agri-market conditions (especially fertilizer). Despite the decline in profitability, Cargill remained free cash flow positive (before working capital) at the end of H1 2010 (November 30, 2009). With reduced working capital requirements resulting from continued easing of commodity prices during F2009 (May 31, 2008, to May 31, 2009), the Company generated significant free cash flow and used it to reduce debt levels. With continuing economic recovery, including expected improvements in fertilizer markets, DBRS expects overall 2010 earnings to recover and, as such, expects Cargill to restore its coverage metrics to levels more commensurate with the rating. Additionally, Cargill’s rating continues to be supported by its strong business risk profile, with well-diversified and integrated operations, a formidable market position and scale and ongoing growth in global demand for agricultural commodities.

All segments reported lower earnings in F2009 except the Industrial segment. Turmoil in the financial markets led to a loss in the Risk Management & Financial (RMF) segment. Although most segments stabilized in the first half of 2010, the demand for fertilizer dropped precipitously, reflecting the prevailing soft agri-market.

Despite a weak H1 2010, overall earnings are expected to recover in H2 2010 (not to levels experienced in 2009 but still higher than historical norms) as commodity markets start to pick up. The Company has already seen the bottom of the market (e.g., fertilizers) and, as such, earnings are expected to grow (albeit slowly). Earnings will be partly boosted by a global resurgence in fertilizer markets as farmers increase application rates, driven by nutrient-depleted soils. Expected earnings improvement should restore coverage metrics to be more in line with the rating range compared with H1 2010.

As commodity prices eased in F2009, Cargill’s working capital requirements reduced substantially, contributing to a notable increase in free cash flow. Strong free cash flow allowed Cargill to reduce short-term borrowings and lower its total recourse debt balance. Strong operating cash flows, reduced debt levels and larger cash balances have resulted in a noticeable improvement in leverage metrics to a level more commensurate with the Company’s rating category.

While earnings and cash flow will be lower in F2010 compared with F2009, DBRS believes that reduced capex and dividends will help maintain relatively strong levels of free cash flow before working capital. The Company does not plan to use free cash flow for meaningful debt reductions but instead for growth either organically or through acquisitions. That said, DBRS expects that Cargill will continue to control debt levels, keeping its risk profile relatively stable in the near term.

If the Company’s profitability does not improve as expected and metrics do not recover or if significant debt is used to finance growth, this could lead to a negative rating action.

Notes:
The Cargill Limited ratings are guaranteed by its U.S. parent, Cargill, Incorporated.

All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Consumer Products, which can be found on our website under Methodologies.

This is a Corporate (Consumers) rating.