SASKATOON – It could become more expensive for Alberta Wheat Pool to borrow money after a Canadian bond rating agency lowered the pool’s rating last week.
Dominion Bond Rating service lowered the pool’s rating from R2 High to R2 Middle because of the agency’s concern over the pool’s ability to turn a profit, said David Schroeder Dominion’s financial analyst in Toronto.
A lower bond rating makes it more expensive to borrow money. Alberta Wheat Pool is the first grain company to have its bond rating lowered in years, said Schroeder.
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“The real concerns are the profitability of the pool. The profitability in the past five years has been poor or at least weak.
“The industry changes which are going on with deregulation poses new challenges and (the pool’s) outlook for earnings is in doubt,” said Schroeder.
According to Alberta Pool’s 1994 annual report, the return on equity in 1994 was 2.83 percent and .34 percent in 1993. In comparison Saskatchewan Wheat Pool’s return on equity in 1994 was 8.2 percent and 6.9 percent in 1993.
But Alberta Wheat Pool chief executive officer Gordon Cummings said although he’s “not happy” about the downgrading, he’s looking at it more as a message.
Call for change
“It’s a communication to members, the board and me that the status quo doesn’t fly.”
He said the last rating from the bond agency was R2 High stable. Since then the company has done things to move forward.
The rating agency “knocks you down” and if they see changes implemented they’ll bring the rating back up, he said.
The downgrading won’t make any difference to the company’s financial position in the short term since it doesn’t issue bonds as a way to raise money. The downgrading has caused more of an image problem, but it will cost the company more if it wants to raise money through bond issues, said Cummings.
Schroeder said Alberta Pool is lagging behind some other grain handling companies in switching from wooden grain elevators in several small towns to a few high throughput and concrete elevators in key locations.
“There are a lot of older high-cost elevators that they’ll have to close down. It’s going to take time,” he said.
In its annual report, Alberta Pool said it hopes to reduce country elevators from 250 to 100.
Cummings said the pool doesn’t have the “perfect plan,” but is in the process of “devising a real serious plan.”
With changes to the Western Grain Transportation Act and elimination of grain freight subsidies that encourage grain shipment to the coast, the company has to predict if grain will stay in the province, move north or south, east or west and design its elevators accordingly.
The bond rating agency follows the performance of all the grain companies in Canada. On the Prairies, the grain company hierarchy is now Saskatchewan Wheat Pool, Alberta Wheat Pool, United Grain Growers and Manitoba Pool Elevators, Schroeder said.
In the Canadian market, R1 Low is the lowest rating in which a company can issue commercial paper. With R2 High, a typical Canadian company might be able to issue on its name or local market. With a rating of R2 Middle there are very few issues except for the wheat pools. Manitoba Pool Elevators issues with a lower bond rating, but in a local market.
Schroeder said his agency recently changed its trend with United Grain Growers from positive to stable based on the company’s earnings and outlook. He said UGG has “improved significantly” since going public.
It recently reconfirmed an R2 Low rating for Manitoba Pool Elevators.
