NEW YORK, US — Moody’s Investors Service on July 9 affirmed the A2 senior unsecured ratings of Cargill Inc. and said the ratings outlook is stable.
“Cargill continues to perform well despite the economic fallout from the coronavirus pandemic,” said John Rogers, senior vice president at Moody’s and lead analyst on Cargill. “We expect credit metrics to remain strongly supportive of its A2 rating despite some uncertainties over the impact of US-China trade relations over the next four quarters.”
The A2 rating, “considered upper-medium grade and subject to low credit risk” is supported by the scale of Cargill’s global commodity-oriented businesses and strong liquidity, Moody’s said.
“Cargill has a long history of operating and trading in volatile commodity markets, and its global scale and extensive sourcing and logistics network are both key to its strategy,” the ratings agency said. “Cargill's vertical integration from key commodities to higher-margin downstream products is viewed as a credit positive over the longer term.”
The agency said Cargill is expected to continue reducing costs and selling underperforming businesses, using proceeds to pursue small to mid-size acquisitions.
In the coming 12 months, Cargill is likely to sustain challenges in its origination and processing businesses because of the coronavirus. Strength in animal nutrition and protein together with solid demand for food ingredients should allow Cargill to generate EBITDA in excess of $6 billion, Moody’s said.
“Additionally, Moody’s expects Cargill's primary end markets to rebound quicker as the global economy emerges from the coronavirus pandemic,” the ratings agency said. “However, despite the signing of the phase one trade deal with China in January, Moody’s remains cautious on the ultimate level of trade given more recent political statements by the US in an election year.”
Moody’s predicted that Cargill’s heritage trading and merchandising businesses will continue to become a smaller part of the company’s earnings profile over time. The shift will reduce Cargill’s exposure to “unusually volatile commodity markets.”
“Margins in this segment are expected to remain relatively thin, except during periods of volatile agricultural commodity prices,” the agency continued. “Moody’s expects that any decline in fiscal 2021 performance relating to the coronavirus will be short-lived and will not materially affect Cargill’s credit profile, as the company is strongly positioned in the rating category and maintains solid credit metrics.”
Constraining Cargill’s credit profile is its susceptibility to volatile earnings and ongoing possibility of larger working capital needs when commodity prices rise, together with basis risk on many derivatives
“Nevertheless, credit metrics are strongly supportive of the A2 ratings with net debt/EBITDA of 1.6x, funds from operations/debt of 45% and retained cash flow/net debt of 45% for the 12 months ended February 28, 2020.”
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