Canada’s two biggest grain companies could have a harder time borrowing money.
In recent weeks, both Saskatchewan Wheat Pool and Agricore Co-operative Ltd. had their credit ratings downgraded by Dominion Bond Rating Service.
Agricore, whose rating was dropped by one level, is no longer considered “investment grade.” Among other things, that means it will be unable to get financing from Canadian insurance companies.
“Obviously we disagreed with the rating and clearly we would rather it had not happened,” said Agricore’s chief executive officer Gordon Cummings.
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But he added it’s not the end of the world. The company will seek other forms of financing as required and carry on with programs designed to control costs and prudently manage its cash resources.
Cummings also complained that the rating reflects a longstanding bias held by DBRS, against traditionally financed co-operatives, noting that Agricore has raised money successfully in the past and performed as well or better than its main competitors last year.
Sask Pool, which saw its rating reduced by two steps, is still investment grade, but the change could make it more difficult or more costly for it to access debt financing.
“It is not positive, but it is not really negative either,” said the pool’s chief financial officer Lyle Spencer. “It’s not that important right now.”
If the company was actively seeking new long-term debt, then it would be bad news, he said, but that’s not the case.
“It’s not unexpected,” he said, adding the pool knew that its high debt levels and poor earnings didn’t bode well for its credit rating.
Sask Pool’s rating for long-term debt was downgraded to BBB-low from BBB-high, while its rating for commercial paper was reduced to R2-middle from R2-high.
Agricore’s rating for long-term debt was dropped from BBB-low (the lowest classification for “investment grade”) to BB-high, while its commercial paper rating was downgraded from R2-middle to R2-low.
Both companies were given a “stable” trend, meaning no rating change is expected during the next year.
David Schroeder of DBRS said the decision to downgrade a company’s credit rating reflects major changes in a company or industry.
“We don’t do it for cyclical reasons,” he said. “It’s usually if there is a structural change or an outlook for a structural change that’s going to occur and impact a company.”
DBRS says Agricore’s debt levels are too high and the outlook is “challenging” with cash flow unlikely to cover spending requirements until the 2001-02 fiscal year. While poor industry conditions are partly to blame, DBRS said, the company must move more quickly to centralize its elevator system and cut costs.
The rating agency said Sask Pool has performed below expectations and won’t recover its financial strength for some time. Debt levels are “excessive” and earnings are expected to remain weak this year. The company’s fundamental corporate strategy is good and deregulation of the industry could benefit the pool.
The ratings are used by lenders to assess the degree of risk involved in lending money to a particular company. For long term debt, the highest rating is AAA-high, and the lowest is C. For commercial paper, the top is R1 high and the bottom is R3.
United Grain Growers is BBB-low and R2-middle and is being reviewed by DBRS. Cargill’s Canadian operation is R1-low for commercial paper and has no long-term rating.
