May 30 -
-- Marubeni will fully acquire Gavilon for US$3.6 billion, which is equivalent to 33% of its total capital as of March 2012.
-- We believe Marubeni is likely to deleverage in order to achieve its target debt/equity ratio of 1.8x, although we are uncertain if it will succeed.
-- We revised the outlook on Marubeni to negative and affirmed the rating at 'BBB'.
Standard & Poor's Ratings Services said today that it had revised the outlook on the long-term counterparty rating on Marubeni Corp. to negative from stable, and affirmed the rating at 'BBB'. The rating actions follow Marubeni's announcement that it will fully acquire U.S.-based grains company Gavilon Holdings LLC. (not rated) for US$3.6 billion. The amount is equivalent to 33% of Marubeni's total capital as of March 2012. In our view, Marubeni will likely incur a substantial amount of goodwill on the acquisition, which will weaken its capital quality. The transaction is subject to regulatory approvals and the company expects the deal to close in September.
Gavilon had total assets of approximately US$6.2 billion as of December 2011. Through the acquisition, those assets will be consolidated into Marubeni and increase its leverage significantly. Marubeni's debt/equity ratio is likely to exceed 2.2x by March 2013--taking into consideration the acquisition payment, Gavilon's debt (US$2 billion according to media reports), and other committed investments besides Gavilon--if its capital increases as the company expects. Marubeni aims to bring down the ratio to 1.8x by March 2013, by taking measures such as selling assets. In our opinion, the management's commitment to manage the ratio is strong.
Standard & Poor's views Marubeni's deleveraging plan with uncertainty, given that financial markets remain volatile and the global economy is showing signs of weakness. Against this backdrop, a drop in commodity prices and weaker global demand may hurt Marubeni's financial performance. And in light of its increased leverage, Marubeni's credit profile will become more susceptible to financial stress.
We affirmed the rating on Marubeni to reflect its strong revenue base and adequate liquidity. Marubeni's revenue base is diversified. It is particularly strong in high-margin energy and resource businesses, as well as relatively stable nonresource businesses, such as power production, food, and chemicals. In our view, Marubeni has adequate liquidity and it has strong relationships with major Japanese banks. The acquisition will be funded by bank loans.
Gavilon is the third-largest grain trader in the U.S. and it is also strong in the fertilizer business. Marubeni is strong in both businesses, and it may be able to reap synergies from the acquisition by marketing grain products in Asia and integrating its fertilizer businesses in the U.S. On the other hand, the operating performance of Gavilon's grain and fertilizer businesses has been weak and is subject to volatility, in our view (for more details, please see "The Gavilon Group 'BB' Rating Affirmed, Outlook Revised To Negative Based On Weak Operating Performance," published May 17, 2012). It may be difficult for Marubeni to gain sufficient cash flow relative to the large investment, if the global economic weakness negatively affects the acquired business.
We may revise the outlook to stable if we find reason to believe that Marubeni will maintain its debt/equity ratio at around its target of 1.8x in the medium term. The company may be able to achieve substantial deleveraging through measures such as asset disposals. Conversely, we may lower the rating if the balance between its risk volume and capital/earnings deteriorates significantly or we believe that its leverage will remain higher than 2.5x in the medium term.
General Criteria: Principles Of Credit Ratings, Feb. 16, 2011
2008 Corporate Criteria: Analytical Methodology, April 15, 2008
The Gavilon Group 'BB' Rating Affirmed, Outlook Revised To Negative Based On Weak Operating Performance, May 17, 2012