DBRS Assigns BBB, Stable Rating to Agrium Inc. $1.0 Billion Debt Issue

DBRS Limited (DBRS) has today assigned a rating of BBB with a Stable trend to the $1.0 billion aggregate principal amount of Senior Unsecured Debt comprising $550 million aggregate principal amount of 3.375% debentures due March 15, 2025, and $450 million aggregate principal amount of 4.125% debentures due March 15, 2035 (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, which the Company indicates was approximately $924 million as at February 23, 2015. DBRS does not expect the issue of the New Notes to have a material impact on Agrium’s 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 Corporation, as subsequently 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. As of December 31, 2014, Agrium had approximately $5,097 million of indebtedness outstanding that ranks equally with the New Notes. 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 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 as well as limit Agrium’s ability to create certain liens.

Agrium had a mixed year in 2014 with record gross profit from its Retail unit and generally weak gross profit from its Wholesale unit because of lower potash and phosphate prices and lower potash production at Vanscoy, which was caused by mechanical failure on its main hoist system and extended production interruptions to tie in the Vanscoy one million tonne expansion project. Agrium’s 2014 operating income before finance costs, income taxes, equity earnings and other non-operating expenses was $1.2 billion, down 26.3% compared with 2013 figures. As a result, the Company’s operating cash flow for 2014 (as calculated by DBRS), was $1.3 billion, down 25.7% from 2013. With capital expenditures (capex) totalling $2.0 billion in 2014 (about 3.7 times 2014 depreciation) and dividends of $430 million, the Company’s cash used was $1.3 billion before approximately $65 million spent on other non-operating cash needs/sources, leading to a $1.2 billion increase in net debt during the year for the Company.

Agrium has indicated that it expects its total capex in 2015 to be in the range of $1.2 billion to $1.3 billion, significantly lower than in 2014 as it completes expansion projects during the year. In addition, with the expansion of Vanscoy to be completed in 2015, the mine is expected to increase output to between 1.9 million tonnes to 2.2 million tonnes, up from the 1.3 million tonnes sold in 2014, adding to earnings potential. DBRS expects these factors, along with the completion of other expansion projects and the continuation of efficiency efforts, to reduce the Company’s need for external funding in 2015, all other things being equal, although the Company continues to increase its dividend-per-share rate and has an outstanding Issuer bid for its shares. Accordingly, the Company will need to remain prudent if its wishes to reverse the deterioration of its credit metrics seen in 2014.

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 (January 2015), which can be found on our website under Methodologies.