S&P Downgrades Scotts Miracle-Gro (SMG) to 'BB'; Sees Higher Debt-to-EBITDA Under New Financial Policy

Standard & Poor's Ratings Services lowered its corporate credit rating on Scotts Miracle-Gro Co. (NYSE: SMG) to 'BB' from 'BB+'. The outlook is stable.

We also assigned our 'B+' issue rating to Scotts' proposed $300 million senior unsecured notes due 2023, with a recovery rating of '6', indicating our expectation that creditors could expect negligible (0% to 10%) recovery in the event of a payment default. In addition, we assigned our 'BB' issue rating to the proposed $1.9 billion five year senior secured bank credit facility (comprising a $1.6 billion revolver and new $300 million term loan) with a recovery rating of '3', indicating that creditors could expect meaningful (at the higher end of the 50%-70% range) recovery in the event of a payment default. We also lowered our issue rating on Scotts' existing $200 million senior unsecured notes due 2020 to 'B+' from 'BB-' with a recovery rating of '6'.

Our ratings assume the proposed transactions close on substantially the terms provided to us. We estimate total debt outstanding pro forma for the proposed transactions and after the $300 million August 2015 payment to Monsanto will be about $1.1 billion as of the fiscal year-end Sept. 30, 2015.

"The downgrade reflects our forecast that the company's more aggressive financial policy will result in a debt to EBITDA ratio sustained in the low- to mid-3x area over the next few years, which is higher than we previously factored into our ratings," said Standard & Poor's credit analyst Gerald Phelan. "We project the company will add at least $100 million of debt annually for share repurchases and acquisitions."

Standard & Poor's ratings on Scotts reflect the company's dominant position in the lawn and garden product industry, which we consider to be a large and important category for Scotts' key retail customers; and the solid market shares and good consumer awareness of its Scotts, Miracle-Gro, and Ortho brands. The company is also Monsanto Co.'s exclusive marketing and distribution agent in certain countries for the popular consumer Roundup herbicide, which accounts for about 15% of Scotts' profits. The company's brands are generally the clear market leader in their categories; they face some private-label competition, particularly in fertilizers, but still have meaningfully higher market shares. Scotts also faces solid competition from Spectrum Brands Inc. and Bayer AG (both in pest and weed controls), Central Garden & Pet Co. (in grass seeds), and numerous regional competitors in growing media, in which barriers to entry are low.

Our ratings also incorporate Scotts' focus in a highly seasonal industry, which adverse weather conditions can hurt; the potential for volatile input costs; the company's high customer concentration (albeit with long-term relationships with financially solid retailers); and ongoing perceived health and environmental risks, which we assume the company will continue to successfully mitigate.

The outlook is stable. We forecast relatively consistent operating performance though we believe debt will increase and credit ratios weaken as a result of more aggressive financial policy, resulting in debt to EBITDA sustained in the low- to mid-3x area and FFO to debt around 20%.

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