DBRS Upgrades Saskatchewan Wheat Pool Inc. to BB (high), Trend is Positive

DBRS has upgraded Saskatchewan Wheat Pool Inc.’s (SWP or the Company) Senior Secured Notes rating to BB (high) from B (high), now with a Positive trend. At the same time, DBRS has discontinued the rating of SWP’s Senior Secured Debt (operating line). This removes the ratings from Under Review with Developing Implications where they were placed on November 7, 2006. DBRS has also assigned a rating of BB (high) to SWP’s new Bank Bridge Facility, also with a Positive trend. These rating actions follow the completion of SWP’s acquisition of Agricore United (Agricore) on June 15, 2007.

SWP acquired the outstanding shares of Agricore for $1,232 million, financed by net equity proceeds of $883 million, and $349 million of a $750 million bank bridge facility. Approximately $360 million of the bridge facility was used to repay essentially all long-term debt outstanding at Agricore (those ratings have subsequently been discontinued). Corresponding with the purchase of Agricore, SWP entered into certain asset sale agreements with Cargill and James Richardson International for proceeds of $70 million (applied to operating line) and $255 million (to be applied to bridge loan) respectively. SWP will have approximately $440 million outstanding on the bridge facility, and $100 million of previously issued notes.

SWP’s earnings profile will benefit from the enhanced market position, scale, diversification (product and geographic), and synergies that should arise from the Agricore acquisition. DBRS estimates SWP will generate EBITDA of more than $300 million by F2009 – after asset sales and synergy target of $90 million. SWP is also expected to increase investment in new business opportunities within the agricultural sector going forward with a focus on higher value-added growth areas such as ethanol, bio-diesel, crushing, refining, seed development, and financial services. DBRS views SWP’s earnings profile as well placed within its new rating category despite risks associated with integration.

In terms of financial profile, DBRS estimates SWP has the potential to generate $200 million to $250 million of operating cash flow in relatively normal crop years, while maintenance capex is expected to run in the $60 million range. DBRS expects SWP will use free cash flow primarily to finance future investments, as the Company turns its focus toward growth opportunities. DBRS also believes SWP may consider returning any residual free cash to shareholders in the form of share repurchases/dividends. As such, DBRS does not expect a meaningful reduction in absolute long-term debt levels in the near to medium term; however, DBRS views SWP’s financial profile as flexible.

DBRS believes SWP has the potential to improve to a low-investment-grade risk profile over the near to medium term should it achieve its merger targets, display enhanced earnings stability, and/or reduce long-term debt going forward.

Notes:
All figures are in Canadian dollars unless otherwise noted.
The Senior Secured Notes were unsecured previously, but were given status equal to the Bank Bridge Facility upon its implementation.
The Senior Secured Debt that has been discontinued represents SWP’s senior bank facility (operating line).