DBRS Upgrades Viterra to Investment Grade

DBRS has today upgraded the ratings of Viterra Inc.’s (Viterra or the Company) Senior Secured Notes and Bank Credit Facility to BBB (low) from BB (high), with a Stable trend. This action removes Viterra from Under Review with Positive Implications where it was placed on April 22, 2008.

On July 18, 2007, DBRS upgraded Viterra’s Senior Secured Notes to BB (high), and applied a Positive trend following the completion of its acquisition of Agricore United. At that point, DBRS noted that it believed the Company had 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. DBRS also expected Viterra to increase investment in new business opportunities within the agricultural sector going forward with a focus on higher value-added processing and geographic expansion of its core operations.

On April 22, 2008, DBRS placed Viterra’s ratings Under Review with Positive Implications following the Company’s announcement that it had entered into a commitment to sell common shares for net proceeds of approximately $440 million. Viterra closed this equity offering in May 2008 and stated that proceeds would be used for general corporate purposes, including funding of future acquisitions. Viterra stated that its strategic expansion would be focused on increasing the Company’s valued-added processing capabilities and growing its core operational footprint geographically.

In terms of operating performance, Viterra has exceeded DBRS’s expectations with regards to synergies and profitability in general as of April 30, 2008 (close to one year after the closing of the merger). The Company generated H1 F2008 EBITDA of $160 million (versus DBRS estimated pro forma of $95 million year-over-year) as a result of achieving a 42% share of the western Canadian grain handling market, stronger margins in both Grain Handling and Agri-Products segments, as well as $45 million (to date) of merger synergies. DBRS estimates Viterra’s LTM adjusted pro forma EBITDA for the period ending April 30, 2008 was $425 million.

Viterra’s earnings profile was expected to benefit from enhanced market position, scale, diversification (product and geographic) and synergies as a result of the Agricore acquisition. DBRS originally estimated that Viterra would generate EBITDA of more than $300 million by F2009 – after asset sales and synergy target of $90 million. DBRS now estimates that Viterra could achieve almost all of its targeted synergies by the end of F2008, and generate EBITDA of close to $450 million in F2008 as a result of strong execution and exceptionally strong fundamentals in the agricultural sector. Going forward, and under normal conditions, DBRS estimates that Viterra should still generate EBITDA of at least $350 million per year.

In terms of financial profile, DBRS now estimates that Viterra should generate close to $300 million of operating cash flow in F2008. In relatively normal crop years, DBRS estimates that Vieterra should generate operating cash flow of approximately $250 million, while maintenance capex is expected to run in the $60 million range. This resulting higher level of free cash flow is still expected to be used primarily for future investment. As such, DBRS does not expect reduction of absolute long-term debt levels (Senior Notes and a Long-Term Bank Credit Facility which rank pari passu and currently total $600 million); however, DBRS views Viterra’s financial profile as flexible. Note that the working capital intensive and seasonal nature of Viterra’s business typically results in short-term debt (Secured Revolving Credit Facility) to fluctuate between zero and approximately $600 million over the course of a year.

DBRS has reviewed Viterra’s updated business and financial strategy with a specific focus on the nature, magnitude and pace of the Company’s growth plans. DBRS believes Viterra management is committed to carrying out its growth strategy in a measured, disciplined and financially balanced manner. DBRS’s upgrade to BBB (low) and Stable trend reflect its view that Viterra’s overall credit risk profile is now commensurate with a low investment-grade rating, and its expectation that the Company will be managed with the aim of keeping it placed in the BBB range.

Note:
All figures are in Canadian dollars unless otherwise noted.