Fitch Places Monsanto Company's Ratings on Negative Watch

CARACAS, Venezuela--(BUSINESS WIRE)-- Fitch Ratings has placed Monsanto Company's (Monsanto) 'A-' Long-Term Issuer Default Rating (IDR) on Rating Watch Negative.

The rating action follows Bayer AG's (Bayer) announcement that is has signed a definitive agreement to acquire Monsanto for a revised $66 billion acquisition price including assumed debt. The Negative Watch reflects the potential downgrade of Bayer's IDR to below 'A-' as a result of the merger, which would likely result in a subsequent notching down of Monsanto's IDR and debt ratings if its eventual parent is deemed to have strong influence over Monsanto's financial policy.

Fitch's May 24, 2016 Rating Action Commentary on Bayer noted that the agency expected to likely downgrade Bayer's 'A' IDR by at least two notches following the completion of the transaction. Should Bayer maintain an IDR of at least 'A-', which Fitch views as unlikely, or if the agency believes that Monsanto would be able to continue to manage to its current financial policies and continue independent public reporting, Fitch could stabilize of Monsanto's IDR at its current level.

Should regulatory or other such hurdles derail the deal, Fitch would likely resolve the Negative Watch and assign Monsanto a Stable Rating Outlook, due to Fitch's expectations for continued strong FCF generation over the forecast horizon.

KEY RATING DRIVERS

Offer Details

Bayer's revised offer values Monsanto at $128/share, which represents a 44 percent premium to Monsanto's May 9, 2016 share price. The deal is intended to be financed with a combination of debt and equity that includes a $19 billion equity component Bayer expects to raise through the issuance of mandatory convertible bonds and through a rights issue with subscription rights. Monsanto's shareholders are scheduled to vote on the merger by late calendar year 2016/early 2017 with closing expected by the end of the 2017 calendar year. Bayer currently has in place a fully underwritten $57 billion bridge financing facility to backstop the deal and has committed to pay Monsanto a $2 billion reverse antitrust break fee if the deal falls through.

Strategic Rational of the Transaction

Fitch views the proposed merger as improving Bayer's position in the crop science industry, where the combination will create a leading player. Also, the combination of Monsanto's strength in seeds compliments Bayer's strength in crop protection. The transaction would address higher competitive pressure in the rapidly consolidating agricultural supply industry, a process that is being driven by declining crop prices and structurally reducing income generation in the farm sector.

Leading Market Position

Monsanto's rating reflects its substantive market positions in corn, soybean, cotton and vegetable seeds and traits, and crop protection products. The company has R&D-driven expertise in plant biotechnology and breeding that enables high profit margins and strong cash flows.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Monsanto include:

--Crop protection selling prices decline in FY2016 to reflect lower grain prices and competition offset by improved seed and trait prices and volumes;

--Revenue growth beyond FY2016, improving to 3%;

--EBITDA margins decline to 27% in FY2016 on lower pricing and macro headwinds, improving modestly thereafter on greater seeds and traits sales and lower relative GA and R&D;

--Capital expenditures of $1.2 billion per annum on average;

RATING SENSITIVITIES

The Negative Watch could be removed if: the acquisition falls through; Fitch believes that Monsanto would be able to continue to manage to its current financial policies and continue public reporting; or Fitch believes Bayer would control Monsanto's financial profile; and Fitch rates Bayer at 'A-' or above.

The Negative Watch would likely result in a downgrade if: Fitch views the linkage between Bayer and Monsanto as strong and Bayer is downgraded below an 'A-' IDR.

Monsanto's current sensitivities are detailed below:

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

--Total Debt/EBITDA declines on a sustained basis below 1.25x.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

--Total Debt/EBITDA increases on a sustained basis above 2.25x;

--Liquidity, at least $2 billion of which is cash, of less than $3 billion;

--Regulatory actions that threaten Monsanto's business model.

LIQUIDITY

Solid Liquidity: The company maintains high cash balances and high availability under its $3 billion RCF due March 2020. The revolver has a maximum consolidated leverage ratio (substantially total debt/EBITDA) of 3.5x. Estimated maturities of long-term debt over the medium term are: $900 million in FY2017, $300 million in FY2018 and $800 million in FY2019.

Cash and cash equivalents were $1.2 billion, of which $1.1 billion was held by foreign entities as of May 31, 2016. Fitch assumes 35% of the cash at foreign entities is not readily available to repay debt to represent leakage upon repatriation.

Fitch has placed the following ratings on Rating Watch Negative:

Monsanto Company

--Long-Term IDR 'A-';

--Short-Term IDR 'F2';

--Senior unsecured debt 'A-';

--Commercial Paper 'F2'.

SUMMARY OF FINANCIAL STATEMENT ADJUSTMENTS

Fitch has made no material adjustments that are not disclosed within the company's public filings.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/site/re/869362

Short-Term Ratings Criteria for Non-Financial Corporates (pub. 13 Aug 2015)

https://www.fitchratings.com/site/re/869259

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1011703

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20160914006428/en/

Fitch Ratings
Primary Analyst
Monica Bonar
Senior Director
+1-212-908-0579
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
David Cameli
Associate Director
+1-312-368-3160
or
Committee Chairperson
Shalini Mahajan, CFA
Managing Director
+1-212-908-0351
or
Media Relations
Alyssa Castelli, +1 212-908-0540
[email protected]

Source: Fitch Ratings

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