DBRS Downgrades Cargill to “A” and R-1(low) and Removes It from Under Review

DBRS has today downgraded Cargill, Incorporated (Cargill or the Company) and Cargill Limited’s Senior Unsecured and Commercial Paper ratings to “A” and R-1 (low) from A (high) and R-1 (middle), respectively. The trends are Stable. This removes the ratings from Under Review with Developing Implications, where they were placed on January 19, 2011 following the Company’s announcement that it intended to distribute the 286 million shares of The Mosaic Company (64% of Mosaic’s outstanding shares) that it held to its own shareholders and debt holders.

In its review, DBRS focused on the execution of the transaction and the subsequent reduction of debt, with proceeds raised in the exchange of Mosaic shares with third-party lenders. (Note: In advance of the transaction, Cargill issued short-term debt of approximately $7.0 billion to third parties with the intention of retiring it with Mosaic shares while keeping the cash proceeds from the issued debt on the balance sheet. It was understood that Cargill would subsequently use the retained cash to repay previously existing debt and/or reinvest in its business.) In its January 19, 2011, press release, DBRS stated that it “would expect Cargill to reduce gross debt in a meaningful way in order to offset the effective monetizing of its holding in Mosaic. If debt is not reduced by a level that DBRS believes would be required to keep Cargill’s financial risk profile at least steady, then the current ratings would be under pressure.”

The transaction closed in May 2011 and Cargill exchanged approximately 179 million shares of Mosaic with Cargill shareholders for Cargill stock ($11.6 billion value based on a Mosaic stock price of $65 per share), and it exchanged approximately 107 million Mosaic shares with third parties for Cargill debt owned by third parties ($7.0 billion value based on a Mosaic stock price of $65 per share). Cargill subsequently used approximately $4.8 billion of the $6.8 billion ($7.0 billion minus fees) cash raised in the third-party exchange to pay down recently elevated levels of short-term debt and kept $2.0 billion in cash on hand. It should be noted that the short-term debt balance was already elevated, as accounts receivable and inventory balances increased sharply in the first half of calendar 2011 due to rising commodity prices.

Despite the improvement in the Company’s working capital position, DBRS does not believe that it preserves its financial profile at a level that is consistent with the previous credit rating category. DBRS focuses on long-term debt-to-operating income (and long-term debt-to-long-term assets) in its assessment of the credit risk profile of this working capital intensive business. Since the absolute balance of long-term debt is basically unchanged and long-term investments and consolidated operating income are lower, the financial profile has effectively weakened.

At the end of Q1 F2012, Cargill had long-term debt of approximately $11 billion, long-term assets/investments of approximately $20.7 billion, and consolidated EBITDA of $5.3 billion. This compares with long-term debt of $12.2 billion, long-term assets/investments of $26 billion, and consolidated EBITDA of nearly $7 billion at year-end F2010.

Cash generated from an unwinding of the elevated working capital position that would ultimately be applied to reduce long-term debt – and/or invested in long-term assets that generate an adequate level of incremental operating income in fairly short order – would be required to preserve the Company’s previous financial profile. Since there is significant uncertainty around the eventuality and timing of working capital being converted to cash flow, which would then be used to reduce long-term debt and/or invest in income-generating long-term assets, DBRS believes that it is prudent to recalibrate Cargill’s ratings at “A” and R-1 (low) with Stable trends.

With the split-off of the investment in Mosaic, Cargill also loses some exposure to the growth-oriented fertilizer sector and the liquidity benefit the holding offered. That said, the Company remains extremely well diversified and is well positioned within its new rating categories, now possessing greater flexibility with regard to its investment and financial intentions going forward.

Note: On August 16, 2011, Cargill announced the acquisition of Provimi, a global animal nutrition company, which generates approximately $250 million of EBITDA annually, for $2.1 billion.

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 methodologies are Rating Consumer Products and Rating Companies in the Canadian Grain-Handling Industry, which can be found on our website under Methodologies.