DBRS Places Long-Term Ratings of Deere & Company Under Review with Developing Implications; Confirms Commercial Paper Rating at R-1 (low), Stable

DBRS Limited (DBRS) has today placed the Issuer Rating of Deere & Company (Deere or the Company) as well as the Senior Unsecured Debt rating of Deere and its subsidiaries Under Review with Developing Implications. DBRS has also confirmed the Commercial Paper (CP) rating of the same entities at R-1 (low) with a Stable trend. The confirmation of the CP rating reflects Deere’s significant amount of cushion supporting the rating. These actions follow the Company’s announcement that it will acquire road construction equipment manufacturer Wirtgen Group (Wirtgen) for EUR 4.357 billion in an all-cash transaction. The total transaction value is approximately EUR 4.6 billion (USD 5.2 billion based on current exchange rates), including the assumption of net debt and other consideration.

When considering Deere’s business risk profile, DBRS identified the Company’s concentrated exposure to agricultural equipment sales as one of its key challenges. Wirtgen is the global leader in manufacturing road construction equipment with dominant or very strong shares in most of its key product lines; therefore, the acquisition would directly address this key challenge, reducing the approximate sales mix to roughly 70% derived from the Agriculture and Turf (A&T) division and 30% from the Construction & Forestry (C&F) division from an approximate 80%/20% split. Furthermore, demand growth for road construction equipment has generally been higher than that of Deere’s current business lines and the Wirtgen product suite is complementary to Deere’s, enabling the Company to offer equipment required across the quarry-to-paved road project chain. Deere’s company-wide margins are expected to benefit from both Wirtgen’s higher-margin operations and the benefits of synergies to be achieved over time.

The proposed transaction is expected to close in Q1 2018 (fiscal year-end October) and to be financed with a combination of cash and equivalents on hand ($3.5 billion as at April 30, 2017, plus internally generated cash), repayment of intercompany lending from John Deere Financial Inc. (JDF), and up to $1.0 billion of new debt from the Equipment Operations business. DBRS notes that JDF intends to refinance the inter-company lending with external financing, maintaining its debt-to-equity ratio at a manageable level of approximately 7.5 times (x).

With respect to Deere’s financial risk profile, in its March 6, 2017, rating report, DBRS noted that, based on fiscal 2016 results, “the adjusted debt-to-EBITDA ratio, at about 2.15 times (x) in F2016, was marginal for an “A” rating. An adjusted debt-to-EBITDA ratio weaker than the mid 2x range could put the current “A” rating at risk.” Through the last 12-months period (LTM) ended April 2017, DBRS notes that this key metric improved to 1.95x. DBRS conservatively projects this metric to remain close to 2x through F2017with the potential for a stronger metric when considering the Q2 F2017 A&T performance that was better than expected and the improved 2017 outlook for that segment’s retail sales outlook. In F2018, DBRS believes that this key metric could remain below 2x, supported by the Wirtgen operating earnings contribution and despite the additional $1.0 billion of debt required to finance the acquisition. Adjusted debt-to-EBITDA below 2x is supportive of the current rating given Deere’s strong business risk profile, and the potential for this to improve once the complementary Wirtgen operations are added to the portfolio. DBRS also notes that all key credit metrics improved in the LTM ended April 2017 compared with the LTM ended January 2017 and F2016.

While the Wirtgen acquisition is likely to improve Deere’s business risk profile, DBRS is not likely to consider a rating upgrade without further substantial structural changes in the business that reduce exposure to highly cyclical sectors. A negative rating action may be considered if the recent improvement in the financial profile reversed and concerns arose that adjusted debt-to-EBITDA could rise into the mid-2x range. At this stage, DBRS anticipates that all ratings that are currently Under Review will be confirmed once its review is completed.

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.

The principal methodologies are Rating Companies in the Industrial Products Industry, Global Methodology for Rating Finance Companies, DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers and DBRS Criteria: Guarantees and Other Forms of Support, which can be found on dbrs.com under Methodologies.

The ratings on John Deere Capital Corporation and John Deere Financial Inc. & John Deere Credit Inc. & John Deere Canada ULC are endorsed by DBRS Ratings Limited for use in the European Union.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

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