(The following statement was released by the rating agency)Overview
-- Our ratings on U.S.-based The Gavilon Group LLC, including the 'BB'corporate credit rating, remain on CreditWatch, where they were placed withpositive implications following Tokyo-based Marubeni Corp.'s
(BBB/Negative/--) May 2012 announcement that it will buy Gavilon for $3.6billion excluding debt.
-- Gavilon recently received an amendment on its bank term loan andrevolving credit facilities agreements that provided financial covenant reliefthrough the end of the year and amended its change-of-control clause to permitMarubeni to acquire Gavilon without causing default.
-- We are revising our liquidity assessment for Gavilon to "adequate,"following the company's recent amendment.
Rating ActionOn Oct. 9, 2012, Standard & Poor's Ratings Services said that its ratings onOmaha-based The Gavilon Group LLC, including the 'BB' corporate credit rating,remain on CreditWatch with positive implications, following an internal reviewof the corporate credit rating, including the company's liquidity position.
Gavilon Group had reported debt outstanding of $1.6 billion as of June 30,2012.
We originally placed the ratings on Gavilon on CreditWatch with positiveimplications on May 30, 2012, following Marubeni's May 2012 announcement thatit will buy Gavilon for $3.6 billion excluding debt. We still believe thatGavilon's credit profile will improve following its proposed acquisition. Inaddition, we have revised our liquidity assessment for Gavilon to "adequate"from "less than adequate," given the covenant relief it obtained in its mostrecent bank amendment that relaxed the maximum permitted leverage and minimumpermitted interest coverage ratios until Dec. 31, 2012. We continue to believeGavilon's earnings will remain pressured in the near term, primarily becauseof weakness in the company's more volatile energy business segment, whichgenerated an EBITDA loss through the first half of fiscal 2012 (ended June 30,2012). Still, we believe the covenant amendment will allow the company to haveadequate cushion on its financial covenants over the next year.
We assess Gavilon's business risk profile as "fair" and its financial riskprofile as "aggressive." Key credit factors in Gavilon's business riskassessment include the company's earnings volatility, business segmentdiversification, improving market position, and sound risk managementpractices. However, we believe Gavilon's credit measures may weaken further inthe coming quarters before they begin improving, which we believe will dependin part on energy segment earnings recovery. We estimate Gavilon's ratio ofadjusted debt to EBITDA may exceed 4.5x in the coming quarters compared with aratio of 4.2x for the 12 months ended June 30, 2012. This ratio range iscommensurate with indicative ratios for an aggressive financial risk profile,which include debt to EBITDA of 4x-5x. (As with other agribusiness companies,we net a portion of Gavilon's readily marketable grain inventories against itsshort-term borrowings when calculating credit measures.)
We have revised Gavilon's liquidity descriptor to adequate from less thanadequate, primarily reflecting improved EBITDA cushion on its maximumdebt-to-EBITDA covenant to above 15% over the next year as a result of thisamendment. Our view of liquidity also incorporates the following expectations:
-- We expect liquidity sources (including cash, funds from operations,and revolving credit facility availability) will cover expected cash uses bymore than 1.2x over the next year.
-- Although we expect the company's working capital requirements toresult in negligible free cash flow generation over the next 12 months, weexpect liquidity sources will continue to exceed uses, even if EBITDA were todecline by 50%, which we have stressed to reflect the volatile characteristicsof the company's merchandising and trading operations.
-- In our view, the company has generally prudent financial riskmanagement.
-- The company has sound relationships with its banks.
Estimated annual cash sources of about $275 million in funds from operationsand additional revolving credit facility borrowing capacity should adequatelycover Gavilon's annual debt amortization payments of about $80 million,stressed working capital uses of more than $500 million, annual capitalexpenditures of about $80 million, and any unforeseen liquidity events relatedto the company's commodity trading businesses.
Standard & Poor's will seek to resolve the CreditWatch listing when moreinformation about Marubeni's acquisition financing plans become available andwhen regulatory hurdles are met, making the likelihood of the acquisition morecertain.
Related Criteria And Research
-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Methodology And Assumptions: Liquidity Descriptors For GlobalCorporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Criteria For Rating The Global Branded NondurableConsumer Products Industry, April 28, 2011
-- Use Of CreditWatch And Outlooks, Sept. 14, 2009
-- Standard & Poor's Ratings--And Their Role In the Financial Markets,April 15, 2008
Ratings ListRatings Remain On CreditWatchThe Gavilon Group LLCCorporate credit rating BB/Watch Pos/--Senior secured
$775 mil. term loan due 2016 BB+/Watch Pos
Recovery rating 2The Gavilon Group LLCGavilon Grain LLCGavilon Fertilizer LLCGavilon LLCSenior secured
$2.75 bil. revolver due 2013 BBB-/Watch Pos
Recovery rating 1
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. All ratings referencedherein can be found on Standard & Poor's public Web site at. Use the Ratings search box located in the leftcolumn.(New York Ratings Team)