The Canadian Wheat Board could lose its current top-notch debt rating if it loses its export monopoly and government guarantees, says a credit analyst with Standard and Poor’s.
The company last week downgraded the board’s long-term issuer credit rating from AAA to AA+, with a negative outlook.
Credit analyst Stephen Ogilvie said the downgrade was due to the federal government’s announced plans to end the board’s export monopoly, adding that credit rating companies will be watching the situation closely.
“We expect that government support for the CWB will continue to deteriorate as long as the current government lasts,” he said.
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“The big credit event for the board coming forward will be the next federal election.”
The good news for the board was that its critically important rating on debt, used to finance borrowing for day-to-day operations and currently guaranteed by the federal government, was unchanged at AAA/A-1+.
But Ogilvie cautioned that if the monopoly and government guarantees are eliminated, the board’s ratings, including the crucial debt rating, would undergo a complete reassessment by rating agencies.
While that wouldn’t necessarily result in a downgrade, Ogilvie added there aren’t many AAA-rated private companies in the world.
“They tend to be extremely well-capitalized, highly profitable and at the head of the class in their particular sector,” he said.
“That creates difficulties for the CWB because its balance sheet is weak. It doesn’t have a lot of cash or retained earning, because that’s not what it’s there for.”
Anil Passi of Dominion Bond Rating Service, which doesn’t put out an issuer credit rating for the CWB, said the board’s future debt rating will depend on what kind of changes are made to the agency’s structure.
“If the federal government no longer guaranteed CWB debt, it would be a wide open ballgame,” he said.
Rating agencies would have to assess a variety of factors, including financing, cash flow, mandate, accountability, business strategy, capital structure and customer base.
A non-monopoly CWB would probably be downgraded from current levels, said Passi.
“It would have to be set up pretty bullet-proof to get a triple-A,” he said.
A downgrade in the debt rating would almost certainly mean higher costs for the board and for farmers who market their grain through the agency.
The issuer credit rating that was downgraded last week involves non-debt obligations taken on by the board, including derivative instruments like foreign exchange or interest rate contracts or leases.
CWB chief financial officer Brita Chell said the new AA+ rating is still high and while the board could face a small increase in costs, it shouldn’t affect final returns to farmers.
“The direct impact on farmers should be minuscule,” she said.
However, CWB chair Ken Ritter warned that if investors decide the board is not a safe and secure agency with which to do business, producers could be hurt.
“If we cannot achieve this, the farmers’ bottom lines will ultimately be affected,’ he said.
Opposition politicians in Ottawa jumped on the issue, saying the Standard and Poor’s report lays responsibility for the downgrade squarely on the federal government and its policy on the CWB.
“I challenge the minister to stand in his place and point to a single phrase (in the report) that blames anyone other than this government for what is happening,” said Winnipeg Liberal Anita Neville.
CWB minister Chuck Strahl said the CWB’s board of directors is to blame, not the government.
He described the rating decision as “puzzling,” almost political, since government financial guarantees for the board remain in place.
“Nothing has changed this year, nothing will change next year. The future of the wheat board is bright, positive.”
He said Standard and Poor’s appears to be reacting to predictions of the wheat board’s demise and that is not the government’s fault.
“What is alarming I think to both buyers and to me (and) to supporters of the wheat board is this continual projection that the wheat board is on its last legs, that it can’t survive, that it’s a doomsday scenario,” Strahl told reporters Jan. 31.
In the House of Commons the next day, Neville rejected Strahl’s statement, calling it “an outrageous example of blaming the victim.”