TEXT-S&P rates Monsanto proposed snr unsecured notes

Tue Jul 10, 2012 12:45am IST

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Overview
     -- Monsanto plans to issue $500 million of senior unsecured 10- and 
30-year notes to refinance maturing debt.
     -- We are assigning an 'A+' senior unsecured debt rating to these notes.
     -- All our other ratings on Monsanto remain unchanged.
     -- The stable outlook reflects our expectation that Monsanto's credit 
quality will remain consistent with the ratings, incorporating a "strong" 
business risk profile and "modest" financial risk profile. 


Rating Action
On July 9, 2012, Standard & Poor's Ratings Services assigned its 'A+' senior 
unsecured debt rating to Monsanto Co.'s proposed offering of $500 million of 
senior notes due 2022 and 2042. Monsanto plans to use the proceeds of this 
offering primarily to repay $486 million of notes due Aug. 15, 2012.

All our existing ratings on Monsanto, including the 'A+' corporate credit 
rating and 'A-1' commercial paper rating, remain unchanged.

The outlook is stable.


Rationale
Standard & Poor's ratings on Monsanto Co. reflect a "strong" business risk 
profile and "modest" financial risk profile. St. Louis, Mo.-based Monsanto is 
a leading global producer of seeds and herbicides including Roundup, the 
world's top-selling herbicide brand. Key business attributes include 
proprietary technology in seeds and biotechnology traits, a high degree of 
research and development (R&D) spending (averaging about 10% of sales, but 
higher the past two years), and a promising product pipeline, all of which 
constitute high entry barriers. Moreover, we believe that long-term trends 
such as population growth and improving living standards and diets should 
promote increasing demand for seeds and traits. 

Monsanto provides seeds with traits such as herbicide tolerance and resistance 
to pests. This permits lower tillage and reduces pesticide requirements. An 
important recent development is seeds with lower refuge area requirements (the 
area required to be planted with conventional seeds to prevent pests from 
developing resistance). Also new is a biotech drought-tolerant corn product 
that is undergoing on-farm testing and which Monsanto expects to launch 
commercially in the U.S. for the 2013 planting season. Monsanto also recently 
created a technology business unit that uses advanced agronomic practices, 
seed genetics, and on-farm technology to help optimize farmers' yields while 
using fewer resources. It expanded this unit with the recent acquisition of 
Precision Planting Inc. for $210 million, plus a potential performance-based 
payment of up to $40 million.

Although Monsanto faces some opposition to genetically modified food 
(especially in Europe), it is widely accepted in the U.S. and has been gaining 
acceptance elsewhere in recent years. As a result, we believe Monsanto has 
opportunities for increased market penetration. The seeds business comprises a 
few large global competitors such as Pioneer (not rated) (owned by E.I. DuPont 
de Nemours & Co. ) and Syngenta AG (A/Stable/A-1), but much of 
the industry remains fragmented. 

Monsanto's significant global presence and diversity across a number of crops 
reduce its vulnerability to regional downturns. However, Monsanto is less 
diversified than other similarly rated industrial companies. Most of its 
products are dependent on commercial agriculture (a small part of its business 
is lawn and garden), and more than 75% of sales are in the Americas. Also, 
despite diversification into crops such as cotton and vegetables, Monsanto 
still relies heavily on corn and soybeans. The company expects to become 
somewhat more global and more balanced by crops and regions during the next 
three to five years. Its plans call for accelerated growth in Latin America 
and Eastern Europe and greater emphasis on vegetables.

Although global long-term seed fundamentals appear favorable, weather, 
commodity prices, government policies, and competition could hurt Monsanto's 
sales volumes in any given planting season. In addition, the company's 
concentration in key planting regions presents political and economic risks, 
and the industry practice of supporting receivables financing for customers 
introduces some credit risk, though, in our opinion, this appears well 
managed. As a result of oversupply conditions and heightened competition from 
generic products, Monsanto has restructured and repositioned its herbicide 
business during the past two years. We expect the amount of the herbicide 
business' contribution to earnings and cash flow to remain approximately at 
current levels, but the percentage contribution is likely to decrease as the 
seeds and traits business grows (herbicides represented 13% of total EBITDA in 
fiscal 2011).

We expect Monsanto to maintain a strong financial profile, with EBITDA margins 
before depreciation and amortization of 25% or higher and pretax return on 
capital of about 15%. For the trailing 12 months ended May 31, 2012, these 
ratios were above 30% and 21%, respectively. As of that date, total debt 
(adjusted to include about $1.1 billion of off-balance-sheet leases and 
customer financing, and tax-effected unfunded postretirement, environmental, 
and litigation liabilities) was about $3.3 billion, and adjusted debt to 
capital was 21%.

Monsanto has gradually increased its dividend in recent years, so that--at an 
annual rate of approximately $640 million per year--it represents nearly 30% 
of net income and is significant relative to its free operating cash flow. 
Share repurchases have also been substantial (totaling more than $500 million 
in each of the past two fiscal years and $423 million in the first nine months 
of fiscal 2012). Although recent acquisitions have been relatively small, the 
company has made large acquisitions in the past, when, with the help of 
stronger cash flow from the herbicide business, it was able to rapidly reduce 
related debt. Management has not expressed any specific leverage- or cash 
flow-to-debt targets, but we expect funds from operations (FFO) to adjusted 
total debt of at least 50% (as of May 31, 2012, this ratio was 97%).

Monsanto is involved in numerous lawsuits and government proceedings that 
could result in large cash outlays. These matters relate to intellectual 
property, antitrust, the environment, personal injury, taxes, and securities 
laws. We will continue to monitor developments and their impact on credit 
quality. In addition, Monsanto is remediating a material control weakness 
related to the timing of recording customer incentive programs. It has also 
launched an offer to rescind certain acquisitions of company stock in an 
employee compensation plan because it may have inadvertently exceeded the 
number of shares registered with the SEC for sale in this plan. We do not 
expect outlays related to this matter to be material.

Liquidity
The 'A-1' short-term rating incorporates our expectation for liquidity to 
remain "strong" (as defined in our criteria) despite significant seasonal 
fluctuations. As of May 31, 2012, Monsanto had about $2 billion of cash and 
short-term investments, and full availability under a $2 billion revolving 
credit facility whose maturity it recently extended to 2016. The company 
primarily uses its credit facility to back commercial paper (it had none 
outstanding as of May 31, 2012). Following the maturity of the 2012 notes, 
there are no significant debt maturities until 2016. 

We expect Monsanto to generate substantial discretionary cash flow in 2012. 
Key uses of cash are likely to include:
     -- R&D outlays of about $1.4 billion;
     -- Pension plan contributions of $84 million; 
     -- Capital spending of $600 million to $700 million, approximately equal 
to depreciation;
     -- Dividends of about $640 million; and
     -- Share repurchases and small acquisitions.

Outlook
The outlook is stable. Monsanto's solid competitive positions and ability to 
generate cash flow support the ratings. Monsanto has significant cushion at 
the 'A+' corporate credit rating for acquisitions, shareholder rewards, or 
temporary operating setbacks. Nevertheless, we could lower the ratings if 
operating earnings and cash flow unexpectedly deteriorate sharply, causing FFO 
to adjusted total debt to drop to and stay below 50%. We believe this could 
occur if revenues fell by about 10% and EBITDA margins dropped to about 18%. 
We could also lower the ratings if shareholder initiatives, acquisitions, or 
adverse litigation were so substantial that they strain credit metrics or 
erode financial flexibility. A downgrade could also occur in the event of a 
major setback in the acceptance or approval of biotechnology products, which 
we consider unlikely at this time. An upgrade is improbable because the 
company's limited business diversity and industry cyclicality constrain the 
ratings.


Related Criteria And Research
     -- Methodology And Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011 
     -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009 
     -- Key Credit Factors: Business And Financial Risks In The Commodity And 
Specialty Chemical Industry, Nov. 20, 2008

Ratings List

Monsanto Co.
 Corporate Credit Rating                  A+/Stable/A-1

New Rating

Monsanto Co.
 Senior Unsecured Notes Due 2022          A+                 
 Senior Unsecured Notes Due 2042          A+
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