S&P Places Agrium (AGU) on CreditWatch Positive Amid PotashCorp (POT) Deal
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S&P Global Ratings said it placed its 'BBB' long-term corporate credit rating on Agrium Inc (NYSE: AGU) on CreditWatch with positive implications. S&P Global Ratings also placed its 'BBB' senior unsecured debt rating on CreditWatch with positive implications. Finally, S&P Global Ratings affirmed its 'A-2' global scale short-term and commercial paper ratings on Agrium.
The CreditWatch placement follows the announcement that Agrium and Potash Corp. of Saskatchewan (BBB+/Stable/A-2) plan to combine their respective companies in an all equity financed transaction. Under the terms of the transaction, PotashCorp shareholders will own about 52% of the new company, and Agrium shareholders will own about 48% on a fully diluted basis. The companies expect to close the transaction by mid-2017 subject to the satisfaction of customary closing conditions, including receipt of regulatory approvals, Canadian court approval, and approval by the shareholders of both companies.
"Our decision to place Agrium on CreditWatch positive reflects our view that its proposed merger with PotashCorp would result in a stronger overall business risk profile for the combined entity," said S&P Global Ratings credit analyst Michelle Dathorne. "We believe the combined entity's expanded product and geographic diversification and vertical integration would result in an improved combined business risk profile relative to our individual assessment of each company's stand-alone business risk profile," Ms. Dathorne added.
The CreditWatch placement reflects the potential that the merger would likely be a credit positive transaction for Agrium. Our satisfactory business risk profile assessment on Agrium reflects the company's favorable market position as a leading crop input distributor and integrated producer of commodity fertilizer products, good operational and business line diversity, and generally low-cost asset base. We believe the merger with PotashCorp would strengthen the company's business risk profile in the wholesale segment from the corresponding increase in scale, scope, and diversity. The combined company will be the largest crop nutrient company in the world and third-largest natural resource company in Canada. On a pro forma basis, we expect the combined company to produce more than 10 million metric tons of low cost potash. We believe the merger will improve operational and geographic diversity in nitrogen and phosphate, with the North American nitrogen business expected to continue to benefit from low-cost feedstock and local distribution.
Our current assessment of Agrium's financial risk profile reflects our estimated three-year, weighted-average (2016-2018) fully adjusted funds from operations (FFO)-to-debt ratios, which are at the lower end of the intermediate category range. Although we expect incremental cash flow generation, and the merged company's expected synergies over the next two years would result in a relative improvement in the pro forma FFO-to-debt ratios, nevertheless, we believe the merged entity's overall financial risk profile would remain firmly in the intermediate category, that is debt to EBITDA below 3x and FFO to debt above 30%.
The CreditWatch placement indicates our view that Agrium's merger with PotashCorp would likely result in an improvement in Agrium's overall credit quality. We expect to resolve the CreditWatch by mid-2017, which is the expected completion of the merger. If the transaction does not occur, we will reassess Agrium's credit profile on dissolution of negotiations.
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