Fitch Rates Land O' Lakes, Inc.'s Preferred Stock 'BB-'
KEY RATING DRIVERS
Fitch considers LOL's proposed merger with United Suppliers Inc. (United) as neutral-to-modestly positive to LOL's current ratings. Fitch anticipates that the merger will be a two-step process, first combining the two companies' seed and crop protection businesses, and subsequently incorporating the crop nutrient business as sales restrictions release over the next few years. Owner/member votes that are required by both companies are scheduled in August 2015. Fitch sees the transaction closing shortly thereafter in October. LOL's ratings factor in equity financing for the transaction with no material long-term debt or cash payments.
LOL's ratings reflect significant scale as the second largest U.S. agricultural cooperative (co-op), consistent EBITDA growth and reasonable credit metrics. LOL's present operations are diversified versus its agricultural peers, with Dairy Foods, Feed, and Crop Inputs each accounting for approximately a third of its revenue. The pending transaction will bolster LOL's more profitable Crop Inputs segment with the addition of United's crop protection, seed and crop nutrients businesses which generated $2.6 billion in revenues in 2014.
The company's competitive market positioning is balanced with its low single-digit EBITDA margins of approximately 3%, which Fitch estimates will improve modestly over the forecast period when combined with United's higher margins as well as stand-alone supply chain efficiency and favorable product mix in dairy and feed. The co-op's long history since 1921, long-term relationships with its grower/owners, as well as strong brands including Land O' Lakes, Purina Animal Nutrition and WinField Solutions, support the ratings.
LOL's capital structure consists of a $575 million secured credit facility due March 2020, $150 million senior secured term loan due August 2021, $325 million in 6.24%-6.77% senior secured private placement notes due 2016 through 2021, $300 million 6.00% unsecured notes due August 2022 and a $500 million receivables securitization facility due March 2020. There are also $200 million junior subordinated capital securities due in March 2028 at Land O' Lakes Capital Trust I. Currently the credit facility, term loan and private placement notes are secured by substantially all of the material assets of LOL and its wholly owned domestic subsidiaries (other than MoArk, LLC, LOL Finance Co., LOLFC, LLC (a subsidiary of LOL Finance Co.) and LOL SPV, LLC). The current ratings take into account that the collateral is likely to be released in the near term so the secured credit facility, term loan, and private placement notes will become unsecured.
LOL is a Minnesota-based co-op originally incorporated to meet the needs of dairy farmers in the Midwest. The company has expanded through mergers, acquisitions and joint ventures to a revenue base of $15 billion and EBITDA per Fitch's calculation of approximately $440 million in 2014. Dairy members supply LOL's Dairy segment with milk, cream, cheese and butter. Ag members purchase agricultural products, primarily feed, seed and crop protection products.
As a co-op, high cash patronage payments of its net profits to grower/owners leave LOL reliant on external sources of liquidity, particularly during the period of heightened capex in the $250 million range annually during the next few years. Fitch treats the patronage payouts, estimated to continue at 60% of the prior year's net income, as dividends. LOL's debt agreements contain credit enhancing restrictions that subordinate the majority of patronage payments to debt payments. However, there is a 20% allowed patronage distribution to preserve the co-op's tax status. LOL's effective income tax rate is substantially lower than the statutory federal and state income tax rates as a result of the tax deductibility of qualified patronage distributions made from net income. Fitch does not anticipate that the merger with United will be dilutive or impact the payout to existing LOL equity holders who will continue to be paid based upon their business generated with the co-op.
LOL's leverage (total debt-to-EBITDA) was 2.6x, total adjusted debt-to-EBITDAR was 3.6x and operating EBITDA/gross interest expense was 6.6x for 2014. Fitch's expects total debt/EBITDA will be approximately flat in 2015 and then improve by approximately one turn to the 1.5x range in 2016, assuming the co-op's next significant maturity, a $155 million private placement note, is repaid with cash on hand. LOL's rent expense is significant at approximately $100 million annually, but roughly 40% comprises inventory storage fees for its crop inputs business that are very short -term.
KEY ASSUMPTIONS
--Approximately 5% sales decline in 2015 mainly due to lower dairy prices, as well as the remaining MoArk sale. Expect total volumes to be up approximately 1% over the next 24-36 months with inter-period input cost volatility.
--Slight improvement in EBITDA in 2015 and CAGR of about 3% over forecast period; EBITDA margins in the low- to mid-3% range.
--Cash payout to members remains at the targeted 60% of prior year net income. Free cash flow (FCF) margin in the range of +1 to-1% of sales after cash payout to members.
--Total debt/EBITDA flat at 2.6x in 2015 and potentially one turn lower in 2016 and beyond on anticipated debt paydown.
RATING SENSITIVITIES
A negative action could occur if there is a sustained weakness or operating profit decline in one of LOL's key business segments, if total debt-to-EBITDA is consistently greater than 3x, and FCF (cash flow from operations less capex and dividends) after patronage dividends remains negative for multiple years. A Board commitment to a patronage payout materially above 60%, which is currently factored into Fitch's base case projections, could also support a negative rating action.
A positive rating action could occur if LOL diversifies its portfolio towards higher growth and higher margin categories, if leverage is sustained below 2x, and the company consistently generates positive FCF. Fitch does not expect a positive rating action in the near term due to the low- growth and low-margin structure of its business segments.
LIQUIDITY
LOL's liquidity is ample at approximately $860 million at March 31, 2015. Liquidity includes $21 million cash and cash equivalents, which varies seasonally, $552 million available on its $575 million senior secured revolver and $287 million available on its $500 million receivables facility. Credit facility availability was reduced by $23.5 million in letters of credit (LOCs). Seasonal working capital needs are highest during the first and third quarters and trough-to-peak liquidity varies by approximately $900 million. Fitch estimates that annual FCF will continue to be relatively flat on average, with FCF margins of +1% to -1%. Given the lack of materially positive FCF during most years, LOL has historically relied on asset sale proceeds to reduce debt.
FULL LIST OF RATINGS
Land O' Lakes, Inc. (LOL)
-- Long-term Issuer Default Rating (IDR), 'BBB-';
-- Senior Secured Credit Facility, 'BBB-';
-- Senior Secured Term Loan, 'BBB-';
-- Senior Secured Private Placement Notes, 'BBB-';
-- Senior Unsecured Notes, 'BBB-';
-- Preferred Stock, 'BB-'.
Land O' Lakes Capital Trust I
-- Long-term IDR, 'BBB-';
-- Jr. Subordinated Capital Securities, 'BB.'
The Rating Outlook is Stable.
Комментарии