-- 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.
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.
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
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.
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
-- Dividends of about $640 million; and
-- Share repurchases and small acquisitions.
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
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
Corporate Credit Rating A+/Stable/A-1
Senior Unsecured Notes Due 2022 A+
Senior Unsecured Notes Due 2042 A+