DBRS Confirms Deere & Company at “A” and R-1 (low), Trends Stable

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Debt rating of Deere & Company (Deere or the Company) and its subsidiaries at “A.” The Commercial Paper ratings are confirmed at R-1 (low). The trend remains Stable. Deere’s rating remains underpinned by its position as the global leader in agricultural equipment manufacturing, its exceptional brand quality and recognition, its excellent product suite and its broad, highly effective distribution network. The key challenge faced by Deere remains its exposure to cyclical agriculture equipment product markets. The recent market downturn, as reflected in material declines in key agricultural commodity prices, and macroeconomic weakness in key emerging markets have led to substantial declines in Deere’s operating earnings and cash flows.

Since DBRS’s update in February 2015, agricultural markets have weakened substantially. Lower prices for key crops have led to lower farming incomes and reduced demand for agricultural equipment, especially higher-margin large-sized equipment. As a result, revenues from Deere’s primary business line, agricultural equipment sales, have decreased substantially (over 20% year over year) and profitability has deteriorated to the point at which the Agriculture and Turf division achieved lower margins in F2015 (ended October) than the Construction and Forestry division, which has not happened in the last six years at least.

DBRS does not expect the Company’s superior business risk profile to change materially in the near term, although incremental progress toward diversifying away from the main agricultural equipment business should be a positive dynamic in the years ahead.

The financial risk profile is expected to deteriorate further in the near term because of the unfavourable market outlook. DBRS expects lower operating cash flow and EBITDA in F2016. Total debt is unlikely to change materially as there are no large long-term debt maturities due until 2019. While liquidity is excellent and Deere is expected to continue to generate substantial free cash flow, debt coverage metrics are expected to weaken. By the end of F2016, operating cash flow to debt is projected to decline to the weak end of the current rating range while debt to EBITDA is forecast to fall further into the BBB (high) rating range. EBITDA interest coverage is expected to fall below the current rating range.

Deere’s current credit rating is supported by its numerous superior business strengths; however, its reliance on demand for agricultural equipment is a source of vulnerability for the financial profile and the current market downturn is exposing this. DBRS will be monitoring Deere’s performance closely for evidence of stabilization across the set of key credit metrics near the projected, weaker F2016 levels. The business profile is given more weight in the determination of the overall credit rating; however, should the trajectory of the Company’s financial metrics deteriorate materially beyond expectations, a rating action such as a trend change may be required. For example, should adjusted debt to EBITDA weaken beyond the mid-2.00 times range, DBRS will need to review the Company’s remediation plan.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodologies are Rating Companies in the Industrial Products Industry (June 2015), Global Methodology for Rating Finance Companies (October 2015), DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (April 2015) and DBRS Criteria: Guarantees and Other Forms of Explicit Support (February 2015), which can be found on our website under Methodologies, which can be found on our website under Methodologies.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.