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S&P Lowers Monsanto (MON) to 'BBB+'; Sees Leverage Increase on New Buyback Plan

June 25, 2014 12:18 PM EDT

Standard & Poor's Ratings Services today lowered its corporate credit rating on St. Louis, Mo.-based Monsanto Co. (NYSE: MON) to 'BBB+' from 'A+'. The outlook is stable.

At the same time, we lowered our existing issue ratings on the company to 'BBB+' from 'A+' and lowered the short-term rating to 'A-2' from 'A-1'.

"The three-notch downgrade of the corporate credit rating to 'BBB+' reflects our view that leverage will increase considerably from current levels to fund the recently announced $10 billion share buyback program along with an approximately $1 billion of buyback under its existing program," said Standard & Poor's credit analyst Henry Fukuchi. Pro forma for the approximately $11 billion buyback, the credit measures (based on weighted average of the current year and two years of forecast) will weaken to levels consistent with the "intermediate" financial risk profile range.

The transaction does not alter our assessment of the company's "strong" business risk profile. The combination of a strong business risk profile and intermediate financial risk profile results in a split anchor outcome of 'a-/bbb+'. We selected the lower outcome because we believe that Monsanto's competitive position is at the lower end of the strong business risk profile category.

Monsanto's strong business risk profile reflects its global leading position in seeds and traits and in herbicides, including "Roundup," the world's top-selling herbicide brand. Key business attributes include proprietary technology in seeds and biotechnology products, a high degree of research and development (R&D) spending (averaging about 10% of sales, but higher the past few years), and a promising product pipeline, all of which constitute high barriers to market entry. Moreover, we believe long-term trends such as population growth and better living standards and diets should promote higher demand for seeds and biotechnology products.

The outlook is stable, reflecting Monsanto's solid competitive positions and ability to generate significant cash flow. We expect the outlook for earnings will remain favorable in the near term, providing support for the share buyback that the company plans to initiate. The stable outlook also reflects the company's commitment to maintain the key credit ratios in the appropriate range including the company's new leverage target of net unadjusted debt to EBITDA at 1.5x. We expect the company to maintain adjusted debt to EBITDA of about 2x and FFO to adjusted debt of about 35%.

We could lower the ratings if operating earnings and cash flow unexpectedly deteriorate sharply, causing adjusted debt to EBITDA to increase beyond 3.0x or FFO to adjusted debt to fall below 30%, with no clear prospects of recovery. We believe this could occur if revenues fell by 10% and gross margins dropped by 3 to 4 percentage points. We could also lower the ratings if shareholder initiatives, and acquisitions, are larger than our expectations, or if a major setback in the acceptance or approval of biotechnology products occurred, which we consider unlikely at this time.

An upgrade is unlikely in the near term due to our expectation of increasing leverage. Longer-term improvement in profitability, and increased product and geographic diversity could bolster the business profile to the upper band of strong, creating momentum for higher ratings.



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