S&P Downgrades Monsanto (MON) to 'BBB'; Ratings Placed on CreditWatch Positive

September 15, 2016 11:54 AM EDT

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S&P Global Ratings lowered its corporate credit rating on Monsanto Co. (NYSE: MON) to 'BBB' from 'BBB+'. At the same time, we placed our corporate credit and issue-level ratings on the company on CreditWatch with positive implications. The short-term ratings remain 'A-2' and are not on CreditWatch.

We lowered the ratings on Monsanto based on our assumption that Monsanto's financial profile will remain weak due to ongoing challenges in its key agricultural markets. We do not anticipate the company's operating environment to improve for at least the next year.

We placed the ratings on Monsanto on CreditWatch with positive implications because we believe that its acquisition by higher-rated Bayer--currently rated 'A-' and on CreditWatch with negative implications since May 20, 2016--could potentially benefit Monsanto's credit quality, which would be consolidated with Bayer at closing.

"Monsanto's strong business risk profile reflects its leading global position in seeds and traits, and herbicides," said S&P Global Ratings credit analyst Paul Kurias. "Our assessment of Monsanto's financial risk profile as significant reflects our expectation that FFO to total debt will remain in the 20% to 30% band over the next several quarters," he added.

The CreditWatch placement reflects our view that there is at least an even chance that we could raise the ratings on Monsanto if the Bayer acquisition is successful. At this point, there is limited information available. We will monitor the situation and review the impact of ongoing developments on Monsanto's credit quality. The companies have announced that they expect the transaction to close in December 2017. We will seek to resolve our CreditWatch placement at the time of the close or sooner if we receive definitive and adequate information.

We will monitor operating performance at Monsanto during the CreditWatch placement and before the transaction closes, and reflect any unexpected changes to credit quality as a result of operating performance in our ratings. At the current rating we expect weighted average funds from operation to total debt of at least 20%.

We could raise the ratings when we resolve the CreditWatch placement if we believe the combined entity's credit quality is indicative of a higher rating. We could affirm the ratings when we resolve the CreditWatch placement if we believe the combined company's credit quality remains about the same. We believe the reported $2 billion breakup fee if the transaction fails to materialize could potentially support or bolster credit quality at Monsanto.

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