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Flat curve presents opportunity in Archer-Daniels-Midland
admin | September 20, 2019
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
Archer-Daniels-Midland (ADM) company’s flat yield curve relative to other single-A credits presents a buying opportunity in intermediate ADM paper. In particular, ADM’s 2.5% 8/11/26 bond looks attractive relative to both Home Depot (HD) 2.125% 9/15/26 and The Coca-Cola Company (KO) 2.25% 9/1/26, as it trades roughly 15 bp wide on a g-spread basis to both credits, compared to the 30-year part of the curve where ADM trades roughly 3 bp through. ADM bonds should benefit from pending debt reduction as management looks to delever from recent acquisitions. Furthermore, ADM has no refinancing needs until 3/1/21 when $495 million comes due.
Exhibit 1: Yield curve comparison (ADM/HD/KO)
Source: Bloomberg, Amherst Pierpont Securities
Liquidity remains strong
Aside from nothing maturing for the next 18 months or so, ADM’s liquidity benefits from multiple untapped revolvers. ADM currently maintains $5 billion of committed credit facilities with maturities ranging from 2019 through 2023 that back up its USD and EUR commercial paper (CP) programs. As of 6/30/19, ADM had $1.5 billion of CP outstanding. While the revolver facilities are untapped, the CP balance reduces borrowing availability to $3.5 billion. ADM will likely renew its $1.5 billion, 364-day facility which is set to mature on 12/6/19. Additionally, ADM had $2.3 billion of availability under its accounts receivable securitization programs. Coupled with cash on hand of $853 million, short term liquidity totaled $6.7 billion at 2Q19. Furthermore, ADM is forecasted to generate just over $2.8 billion of free cash flow after dividends in 2H19, which further supports its liquidity position.
Conservative credit profile
Given ADM’s commodity based businesses, management has historically maintained a conservative credit profile to help offset EBITDA swings during weaker earnings cycles. Currently net debt/total capitalization stands at 31%, up from 27% in the year ago period reflecting the recent acquisitions, though for 2017 and 2018, net debt/capitalization was largely maintained in the 25% area. Net leverage at 2Q19 was just over 2.7x and is expected to decline to the 2.5x area by year end due to EBITDA growth. Management has been focusing on cost controls to improve both margins and cash flow growth. ADM’s disciplined approach to capital spend has annual capex costs at their lowest level in the past 10 years, at about $840 million.
S&P adjusts leverage for potential inventory liquidation
Given ADM’s large commodity trading inventories, S&P adjusts its total debt levels to reflect the potential for rapid debt repayment should AMD liquidate the inventory. As such, while ADM ended the quarter with total debt of roughly $9.4 billion, S&P’s adjustment puts total debt closer to the $7.1 billion area. That said, S&P’s adjusted leverage is currently closer to 2.2x. S&P maintains that trough cycle adjusted leverage will remain close to 2.5x, while leverage in better earnings cycles will be at 2.0x or below.
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