Collateral Support Backs United Agri Revolver

United Agri Products (UAP) has high leverage at 4.7 times EBITDA, but its five-year, $500 million asset based revolver benefits from collateral support under the borrowing base. The credit facility, led by GE Capital and UBS , has been rated BB- and B1 by Standard & Poor's and Moody's Investors Service , respectively. Both rating agencies have notched the revolver rating above the corporate credit rating. The revolver, together with $215 million of unsecured notes, backs the $575 million buyout by Apollo Management and management of UAP from ConAgra Foods . Apollo is contributing $114 million of equity and management $6 million.

The ratings reflect agricultural market risks including the seasonality of sales, the influence of weather and the effects of government subsidies on farm planting decisions, notes Moody's. While UAP tends to have more stable revenues than either farmers or agricultural chemical and fertilizer suppliers, profitability will rise and fall with the North American farm economy as a whole, notes Moody's. The farm economy is highly dependent on subsidies and other government programs that provide monetary assistance to farmers, Moody's adds.

But the ratings are supported by the company's entrenched position as the leading supplier of chemicals, fertilizers and seeds in North America. Long-standing relationships with key agricultural suppliers, modest capital expenditure requirements, and its private label products, which support higher margins are also factors. Finally, the ratings assume that management can continue to improve financial performance and reduce working capital over the next two years. UAP officials did not return calls by press time.