DBRS Rates Agrium Inc. New $500 Million Debt Issue BBB, Stable

DBRS Limited (DBRS) has today assigned a rating of BBB with a Stable trend to the $500 million aggregate principal amount of Senior Unsecured Debt bearing a 5.25% coupon and maturing June 15, 2045 (the New Notes), to be issued by Agrium Inc. (Agrium or the Company), as announced by the Company. The net proceeds of the New Notes are to be used by Agrium to reduce short-term debt and for general corporate purposes. The issue of the New Notes is not expected to have a material impact on credit quality.

The New Notes are to be issued by way of a prospectus supplement to the Company’s short-form base shelf prospectus dated April 24, 2014. They will be subject to the terms of a trust indenture dated May 16, 2006, between Agrium and The Bank of New York Mellon, as supplemented and as to be supplemented by a supplemental indenture related to the New Notes (the Note Indenture). The Note Indenture will be governed by the laws of the State of New York.

The New Notes will be direct senior unsecured obligations of the Company. They will rank equally with Agrium’s existing and future senior unsecured debt, and will rank senior to all of the Company’s existing and future subordinated debt. The New Notes will be effectively subordinated to all indebtedness and other liabilities, including guarantees, of any of Agrium’s subsidiaries, including its wholly owned Alberta general partnership, the Agrium Partnership and the Company’s share of joint venture liabilities.

The Note Indenture contains certain covenants that, among other limitations, restrict Agrium’s ability to amalgamate or consolidate with or merge into a third party or convey, transfer or lease all or substantially all of the Company’s assets and the assets of its subsidiaries on a consolidated basis and limit Agrium’s ability to create certain liens.

Agrium operating income before finance costs, income taxes, equity earnings and other non-operating expenses was $105 million, in the third quarter of 2014, down 29.5% compared to the third quarter of 2013 and $1.0 billion for the first nine months of 2014, down 28.5% compared to the first nine months of 2013. In addition, the Company’s operating cash flow for the third quarter of 2014, as adjusted by DBRS, was negative $466 million, driven by a $542 million investment in working capital. Operating cash flow to September 30, 2014, was $332 million, about 40% lower than the same period in 2013. With capital expenditures of $1.6 billion in the first nine months of 2014 (3.9 time depreciation) and dividends of $323 million, the Company’s funding need was $1.6 billion before $147 million spent on acquisitions (mostly farm centre acquisitions) and other non-operating cash needs/sources. DBRS expects the Company’s challenges will continue with high capital and dividend outlays and a weak operating fourth quarter 2014 for its potash operations, due to the tie-in of the expansion and related maintenance work at Vanscoy plus ongoing challenges in agricultural commodity product prices, leading to pressure on profitability for the Company’s Retail unit.

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

The applicable methodologies are Rating Companies in the Mining Industry (September 2014) and Rating Companies in the Industrial Products Industry (July 2014), which can be found on our website under Methodologies.