Maalot's Rating Downgraded to "ilA+" Due to Weaker than Expected Financial Profile

Maalot's Rating Downgraded to "ilA+" Due to Weaker than Expected Financial Profile; Rating Outlook Stable

Summary

·Makhteshim's current coverage ratios are low and are even incompatible with the current rating. The results of its operations and the financial profile are low also in relation to similar companies in the agrochemical industry, which in the past year benefited from a positive trend in the industry and posted an improvement in their results.

·At the same time, we estimate that the operational improvement, whose first signs are evident in the results for the first quarter, will continue, and the company will achieve operating results and coverage ratios that are aligned with the rating in the short term.

·We estimate that the company is exposed due to the lack of clarity regarding the impact of the acquisition of control of the company on its business strategy and financial policy.

·We are downgrading the rating of Makhteshim Agan Industries Ltd., which engages in the manufacture and marketing of chemicals, from "ilAA-" to "ilA+".

·The stable rating outlook reflects our estimate that the company will maintain a financial profile that is commensurate with the rating in the long term.

Rating Action

·On July 6, 2011, Standard & Poor's Maalot downgraded the rating of the agrochemicals company, Makhteshim Agan Industries Ltd., from "ilAA-" to "ilA+". The rating outlook is stable.

Major Considerations for the Rating

The downgrade of the rating mainly reflects the erosion of profitability and the financial profile. Additionally, we estimate that the company may be exposed due to the lack of clarity regarding the impact of the acquisition of its control by China National Agrochemical Corporation (hereinafter CC) (unrated) on the company's business strategy and financial policy.

In 2010 the company continued to suffer from an erosion of the results of its business operations and its financial profile, even in relation to similar companies in the industry, inter alia as a result of a losing operation in Brazil and a significant drop in the profits of the Glyphosate product. In 2010 the company took intensive action to improve its results and executed, inter alia, a recovery plan in designed to stem the losses in Brazil. These moves, simultaneously with the positive trend in the global agrochemical industry, had a positive effect on the results of operations in the first quarter of 2011. At the same time, current debt ratios are very low in relation to the rating level. In the debt coverage ratios adjusted for the figures representing the twelve months ended on March 31, 2011, the adjusted FFO (funds from operations)-to-debt ratio was just 5.9%, and the debt-to-EBITDA ratio was 6.6x contrary to our expectations, as mentioned in earlier rating reports, for an adjusted FFO-to-debt ratio of above 20% and a debt-to-EBITDA ratio of no higher than 4x.

In view of the recovery measures, the positive trend in the industry and initial positive indications by management in regard to the results for the second quarter, we expect the operating improvement to continue in the short term and that the company will post a significant improvement in its financial profile in the next few years. We estimate that at year end, adjusted debt coverage ratios will be an FFO-to-debt ratio in the range of 15% to 17%, and a debt-to-EBITDA ratio in the range of 4x to 5x.

In 2011 Makhteshim Agan and its controlling shareholder, Koor Industries, entered into a merger agreement with CC, a large Chinese group controlled by the Chinese government which is active in chemistry and agrochemistry. On completion of the merger, the company will become a private company held 60% by CC and 40% by Koor. A shareholders agreement was signed concurrently between Koor and CC, which includes, inter alia, a clause referring to the sale of assets by CC to Makhteshim according to an EBITDA multiplier of 10x less the net debt of these assets, and a dividend distribution policy clause providing for the distribution of a dividend in an amount that is no less than 40% of the company's annual profit. At the same time, as the transaction has not yet been closed and as we are not in possession of sufficient information regarding CC's financial policy, we have not yet weighted the possible impact of the acquisition of assets from CC, which may total as much as $1.2 million, in the financial leverage.

In the medium term, we estimate that Makhteshim Agan is likely to benefit from being owned by a Chinese state company, including increased presence and the possibility of gaining new market share in China. It is noted that at this stage, we have not factored in the rating any support at all by the controlling shareholders of the company.

Liquidity

In our estimate, Makhteshim's liquidity is sufficient. We estimate that the company has good access to a variety of sources that exceed its current requirements. However, we estimate that should Makhteshim make acquisitions on a substantial scale from CC or others, and/or distribute a dividend on a large scale, it will need to obtain additional sources of financing.

The company's sources of financing for the years 2011-2012 include:

·A cash balance of approximately $423 million (as at December 31, 2010);

·A loan received in April 2011 in an amount of $50 million;

·Signed credit frameworks on a scale of approximately $150 million;

·A customer securitization framework on a scale of up to $250 million;

·In our estimate, current cash flows provided by operations in each of the years are over $150 million.

Additionally, the company has short-term credit frameworks from local banks, but not under signed agreements.

On the other hand, major uses include:

·Repayment of loans and debentures on a scale of approximately $300 million;

·Short-term credit turnover of approximately $200 million;

·Investments in retention and product licensing amounting to approximately $150 million;

·Anticipated acquisitions of companies or businesses amounting to $40-50 million;

·Distribution of a dividend of at least 40% of the net profit (according to the shareholders agreement); however, according to company management, no dividend is expected to be distributed in 2011.

As at March 31, 2011, the company was in compliance with all stipulations in the loans it has taken.

The Rating Outlook

The stable rating outlook reflects our estimate that in the short term the company's coverage ratios will stabilize at a level that is commensurate with the current rating. Moreover, the stable outlook reflects our expectations that the company will not make any leveraged buyouts, including acquisitions from CC, and/or distribute dividends on a significant scale, which will impair its liquidity and/or its financial position.

We estimate that the adjusted ratios that are aligned with the current rating are an FFO-to-debt ratio that is no lower than 15%, and a debt-to-EBITDA ratio of between 4x and 5x.

A positive change in the rating is likely in the event that the company achieves a continuous improvement in its results and a permanent change in its financial profile, to a level that is commensurate with a rating that is higher than the present rating.

Negative pressure on the rating is anticipated should the company fail to accomplish the coverage ratios mentioned above, either as a result of fluctuations in the results of its operations or as a result of aggressive actions by the controlling shareholder, such as the distribution of a large-scale dividend and/or large-scale or highly leveraged acquisitions.

List of Ratings

Current ratingPrevious rating

Makhteshim AganilA+/StableilAA-/Negative

Series B – D ilA+ilAA-