DBRS Confirms Agrium Inc. at BBB, Trends Stable

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Debt rating of Agrium Inc. (Agrium or the Company) at BBB with Stable trends. The confirmations reflect that Agrium has turned in better-than-expected operating results and restored all debt coverage metrics to levels more compatible with the current rating despite higher debt level. DBRS expects operating results at Agrium to improve modestly in the near term supported by ongoing efforts to lower production costs, despite a still challenging market outlook. The current rating remains Stable.

Agrium reported stronger earnings in 2015 with solid improvement in the Wholesale business while Retail was relatively flat. Higher sales volumes and lower production costs from all three major products, partly offset by lower selling prices for nitrogen and potash, boosted strong gains in Wholesale’s gross profit. Capital expenditures have declined sharply as expected with the completion of the Vanscoy potash facility expansion. However, internal cash generation was insufficient to fund acquisitions, other investments and share repurchases and the deficit in free cash flow was funded with debt. Stronger operating results were able to keep all debt coverage metrics compatible with the current rating despite the higher debt level; however, Agrium’s financial profile does not have much cushion to weather a downturn. DBRS expects operating results to show modest improvement in the near term, supported by a slight increase at Wholesale (lower production costs and expanded capacity). Additionally, capital expenditures are expected to decline further due to lower planned investment projects. Internal cash generation is expected to be more than sufficient to fund all operating needs. Agrium has been active in share repurchases in the last few years and has announced a new course issuer bid for 5% of outstanding shares (about $620 million at current prices) until February 18, 2017. DBRS notes that the rising debt level, although manageable, remains a concern and expects Agrium to be judicious in the use of debt to fund acquisitions and share repurchases. Any meaningful increase in debt that weakens the credit metrics to below the 2014 levels could lead to negative rating actions.

Agrium’s solid business profile continues to provide a strong support for the current rating. The Company is the largest global crop input retailer with a strong position in key growing regions in the world and a wide range of products and services offerings. The Retail business, which is more stable and less capital intensive, helps moderate earnings volatility. Additionally, Agrium’s integrated business model of combining the production of primary crop nutrients with a direct-to-grower network, close proximity of its production and distribution facilities to end markets, the largest distribution network in North America and access to low cost inputs have all contributed to its competitive advantage.

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) and Rating Companies in the Mining Industry (October 2015), which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link or by contacting us at info@dbrs.com.