OREANDA-NEWS. Fitch Ratings has assigned an 'A' rating to Archer Daniels Midland Co.'s (ADM) $1 billion senior unsecured notes due August 2026. ADM intends to use the net proceeds from the sale of the notes for general corporate purposes, including the repayment of a portion of the outstanding commercial paper indebtedness. At June 30, 2016, ADM's outstanding commercial paper indebtedness was $1.4 billion. The Rating Outlook is Stable.

A full list of ratings follows at the end of this release.


Global Scale in Agribusiness

ADM is one of the largest global agribusiness firms processing soy beans, wheat, oilseeds, corn, and other agricultural commodities. ADM has focused on reducing earnings volatility through asset divestitures or improving existing asset utilization through sale of excess capacity. ADM's acquisition of Wild Flavors in 2014 demonstrates ADM's strategy to also increase offerings up the value chain and beyond origination and processing. ADM has an extensive worldwide logistics network and transportation system allowing the company to procure, store, clean and transport agricultural commodities.

Increased Gross Leverage

Gross leverage increased to 3.0x for the latest-12-month (LTM) period as of June 30, 2016 from 2.0x in 2015 driven by working capital usage and operating earnings pressure. This was due to weakness in U. S. grain handling, limited merchandising opportunities and margin pressure within oilseed crushing and origination during the first half of 2016. Fitch's anticipates operating earnings will increase in the second half of 2016 leading to a moderation in leverage to the mid 2x range more in-line with long-term expectations as operating business fundamentals improve. This is due to prospects for U. S. exports recovering, given the stabilization of the U. S. dollar, the reduced South American crop supply that has been negatively affected by weather, global protein demand remaining strong and expectations for a very healthy U. S. crop harvest.

EBITDA is also supported by cost savings initiatives. ADM achieved approximately $150 million of run rate savings in the first half of 2016 with expectations to achieve $275 million by year-end 2016.

RMI Supports Ratings

In addition to evaluating traditional leverage metrics, Fitch also considers leverage ratios that exclude debt used to finance readily marketable inventories (RMI). RMI, which is hedged and very liquid, could be converted to cash if needed. This high level of liquid inventories, coupled with cash, provides substantial financial flexibility during periods of earnings volatility associated with agricultural cycles, partially mitigating financial risk. ADM's RMI adjusted leverage—which Fitch calculates by subtracting 90% of RMI (after applying a 10% haircut) from total debt of $7.4 billion—was 1.0x for the LTM period ending June 30, 2016.

Exposure to Commodity Volatility

ADM along with other agricultural processors are subject to variations with commodity pricing that can be affected by a range of unpredictable macro environmental conditions that include weather, crop disease outbreaks, and government agricultural policy changes. Thus, ADM can be exposed to periods of volatile agricultural commodity pricing swings stemming from periodic supply/demand imbalances, timing of cash payments or foreign exchange movements that can negatively affect U. S exports. Consequently, operating earnings can be pressured and/or debt can increase, which can quickly increase leverage. During the past three years, global grain supplies have been replenished from large harvests of key crops, limiting volatility and resulting in lower prices.

Balanced Capital Plan

Fitch views ADM's capital deployment balanced between capital spending, shareholder-friendly activities and bolt-on M&A. Shareholder returns have taken precedence lately as ADM increased dividends by 7% and 17%, respectively the past two years to achieve a higher payout ratio, targeting the 30% to 40% range. In 2015 ADM repurchased $2 billion in shares and has targeted share repurchases in 2016 within the range of $1.0 billion to $1.5 billion. Through the first half of 2016, ADM had repurchased $487 million shares.

Fitch anticipates ADM would adjust its repurchase strategy in the case of large M&A, unexpected stress on operating earnings or a significantly higher working capital scenario. Currently, in 2016, bolt-on M&A has totalled $120 million. ADM is also undergoing a strategic review of its ethanol dry mill assets that could result in several alternatives including a joint venture or complete asset divestiture, depending on valuation.

Capital expenditures including value-generating projects are expected to total approximately $1 billion in 2016, a moderate decrease from $1.1 billion in 2015. Fitch sees the heavier shareholder returns and capital spending as currently manageable within expected cash flow generation.


Key assumptions within Fitch's rating case for ADM include:

--Gross margins of approximately 6% over the forecast;

--EBITDA of $2.8 billion in 2016 growing in excess of $3 billion beyond 2016 with EBITDA margin improving from 3% to 3.3%;

--Capital spending of approximately $1 billion for 2016;

--FCF of $150 million in 2016;

--Gross leverage moderating to the mid 2x range by the end of 2016 and the lower 2x range by 2017;

--Share repurchases in line with ADM's publicly stated range of $1.0 - $1.5 billion;

--Modest acquisition activity focused on manageable, tuck-in purchases.


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

--Fitch is comfortable with ADM operating with gross debt leverage in the range of 2.0x to 2.5x. However, rating pressure will arise if EBITDA compression and/or a higher debt load leads to sustained unadjusted leverage exceeding 2.5x;

--Sustained lack of FCF generation lasting over two crop seasons;

--A material increase in leverage from a significant debt financed transaction, most likely a large acquisition.

Fitch sees a positive rating action as unlikely over the intermediate term given ADM's historically high gross debt leverage for the rating category, periodic negative FCF, and vulnerability to significant periodic supply/demand imbalances.


ADM has abundant sources of external liquidity for use in financing its operations worldwide. The company maintains revolving credit agreements totaling $4 billion to provide short-term funding across the globe comprising two $1.5 billion five-year agreements due in December 2020 and a $1 billion

364-day facility expiring in December 2016. The facilities act as a backstop to a $4 billion U. S. commercial paper program. ADM had no borrowings under the revolving facilities and had outstanding CP borrowings of $1.4 billion at the end of the second quarter 2016. Cash, cash equivalents, and short-term marketable securities were approximately $700 million. Maturities remain manageable with $261 million due in 2017 and $560 million due in 2018.

In addition, ADM has domestic and European accounts receivable securitization programs that permit the sale of up to $1.5 billion in receivables. As of June 30, 2016, ADM utilized $1.1 billion of its facility under the programs. Finally, Fitch sees additional support to ADM's already strong liquidity from RMI of agricultural commodities including corn, soybeans, and oilseeds that totalled $4.7 billion on June 30, 2016, including Fitch's discretionary 10% haircut.


Fitch currently rates ADM as follows:

--Long-Term Issuer Default Rating (IDR) 'A';

--Senior unsecured bank facility 'A';

--Senior unsecured notes 'A';

--Short-Term IDR 'F1';

--Commercial Paper Rating 'F1'.