One of Canada’s major credit rating agencies has given Saskatchewan Wheat Pool’s takeover of Agricore United its seal of approval.
Dominion Bond Rating Service last week upgraded the Pool’s senior secured notes rating to BB (high) from B (low), and assigned it a positive trend.
It assigned a rating of BB (high) to SWP’s $750 million “bank bridge facility” used to help finance the takeover, and also discontinued its rating for SWP senior secured debt.
The company said in a news release the Pool has the potential to improve its ratings further if the projected financial benefits of the merger come to fruition.
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Anil Passi, senior vice-president of the rating service, said the upgrade reflects two things.
First, the grain industry in general is in a strong position and both SWP and AU were doing well enough as individual companies to merit a credit upgrade without the merger.
Second, the new company will be the dominant company in the grain industry with strong market share and clout, increased size and scale of operations, greater operating efficiencies and improved geographic and product diversification.
Passi expects the company will expand into new business areas outside of grain handling and crop inputs, such as ethanol, biodiesel, crushing, refining, seed development and financial services.
“All of those things really bode well for reducing risk and as a rating agency what we’re ultimately assessing is the credit risk,” he said.
Another positive factor is that the Pool’s takeover didn’t require the company to take on any significant financial risk, as is the case with many leveraged buyouts.
The new company’s long-term debt is $600 million, which Passi described as “very reasonable.”
The rating agency projects the new company will generate earnings of more than $300 million by 2008-09, and has the potential to generate operating cash flow of $200 to $250 million in normal crop years, with annual capital expenditures of around $60 million.
Passi cautioned that the optimistic outlook all depends on the new company delivering on the promised $90 million in savings that will result from the merger.
One facet of that could be elevator closures.
There will be some tweaking of the system but nothing too extravagant, he said.
