Fitch Ratings has affirmed Deere & Company's (Deere) Long-Term Issuer Default Rating (IDR) and long-term debt ratings at 'A+' and affirmed the Short-Term IDR and short-term debt ratings at 'F1'.
Fitch has also affirmed the Long-Term IDRs and debt ratings for Deere's equipment subsidiaries at 'A+' and their Short-Term IDRs and commercial paper (CP) ratings at 'F1'. Fitch has affirmed the long-term and short-term IDRs of John Deere Capital Corporation (JDCC) and its rated subsidiaries at 'A+' and 'F1', respectively. The Rating Outlook is Stable. Fitch has affirmed JDCC's Shareholder Support Rating (SSR) at 'a+' and senior unsecured debt and CP ratings at 'A+' and 'F1', respectively. JDCC is a wholly-owned, captive finance subsidiary of Deere & Company (Deere).
The ratings for Deere reflect low leverage, strong positions in the company's global agricultural equipment markets, solid FCF that contributes to financial flexibility, and proven product development and technological capabilities that are important to maintaining the company's competitive position.
Key Rating Drivers
Strong Credit Profile: Deere's large scale supports product and geographic diversification across its agricultural, construction, forestry and road-building equipment businesses that mitigate the company's exposure to cyclical demand in its equipment markets. A strong dealer network and financial services businesses support the company's market share and profitability. Potential support required for John Deere Financial (JDF) represents a risk, but Fitch views it as unlikely, reflecting JDF's good portfolio quality and consistent profitability. Fitch expects Deere will maintain conservative financial and capital allocation policies at both its equipment operations and financial services business.
Operating Profile: Fitch expects Deere's operating profile will benefit from higher aftermarket and service revenue over the long term as precision agricultural and other digital technology, including in non-agricultural businesses, becomes increasingly embedded in the company's equipment, contributing to recurring revenue and higher-margin content. This trend should also support a high level of financial flexibility and potentially smooth out the impact of demand cycles. Deere's scale provides opportunities to leverage technology across ag and non-ag businesses that strengthen its competitive positions and realize cost efficiencies.
Technology Focus: Deere actively invests in technology through R&D and acquisitions that increase digital content in Deere's equipment, enabling it to increase its capabilities around autonomous vehicles and equipment, analytics, preventative maintenance, and other applications to boost customer productivity. The increase in digital technology also accelerates the replacement cycle and helps differentiate Deere's product line. Deere's scale mitigates challenges from large global competitors which are also developing digital capabilities.
Low Leverage: Deere's low leverage at the equipment operations reflects solid financial results and generally steady debt levels. As of Oct. 29, 2023, EBITDA leverage was 0.7x as calculated by Fitch, compared to 1.1x at the end of fiscal 2022. A return toward lower, mid-cycle results in 2024 could result in slightly higher, but still low, leverage at around 1x assumed in Fitch's rating case. Fitch expects Deere will continue to balance cash deployment over the long term to maintain a strong balance sheet, including solid liquidity and low leverage through the business cycle which provides capacity for discretionary cash deployment and the ability to support its important financial services business.
Return Toward Mid-Cycle Demand: Following strong demand during the past several years that drove significant sales growth, Fitch expects sales to decline across Deere's operating segments in 2024 toward mid-cycle levels, partly due to lower farm net cash income in the U.S., higher interest rates, and lower commodity prices. Fitch expects the impact of lower demand would be mitigated by an industry fleet age that remains somewhat elevated, replacement demand associated with increasing technology content in equipment, and government incentives around infrastructure spending in the U.S.
Solid Margins: Operating margins increased more than 400 bps in 2023 due to pricing strength as well as an increase in unit volumes. Margins are expected to decline to lower, but still solid, levels in 2024 as Deere realizes benefits from its smart industrial strategy and generates improved results through cycles. Fitch's rating case assumes Deere's mid-cycle margins increase over time as the company makes further investments in technology, with margins still expected to be mixed across various points in the cycle.
Ample Liquidity: Deere's liquidity is supported by solid cash balances at the equipment operations and consistently strong FCF which provides flexibility to invest in the business and fund returns to shareholders. Deere continues to fund capex and R&D spending at elevated levels to improve production efficiency and align its product offerings with customer productivity. Deere's substantial liquidity also provides capacity to support the financial services business, although Fitch believes the need for support is limited.
Support for Financial Services: Fitch's ratings and financial measures for Deere's equipment business consider the finance business on an equity basis. Under Fitch's Corporate and Non-Bank Financial Institutions Rating Criteria, Fitch calculates an appropriate debt/equity ratio of 5x at Financial Services based on solid asset quality, sufficient liquidity and strong funding profile. Actual debt/equity as measured by Fitch was 8.4x as of Oct. 29, 2023. As a result, an equity injection of $4 billion would be needed to reduce Financial Services leverage to 5x, which Fitch assumes would be funded by reclassifying a portion of intercompany payables due from JDF as equity. These payables totaled approximately $4.5 billion as of Oct. 29, 2023.
JDCC
The ratings of JDCC and Deere are equalized as Fitch believes that JDCC is a core subsidiary of Deere as demonstrated by the explicit and implicit level of support between the two entities. JDCC's ratings reflect Deere's 100% ownership, shared brand name, importance of JDCC to helping Deere achieve its strategic objectives and the support agreement between the two entities. The support agreement requires Deere to maintain 51% ownership of JDCC, maintain JDCC's net worth at not less than $50 million, and maintain JDCC's fixed-charge coverage at not less than 1.05x for any four consecutive quarterly periods.
Beyond these support-driven considerations, JDCC's ratings reflect its consistent operating performance, solid asset quality through cycles, sufficient liquidity, and strong funding profile. These factors are counterbalanced by JDCC's elevated leverage relative to stand-alone finance companies, although its leverage is consistent with that of captive finance peer averages.
JDCC's SSR of 'a+' is aligned with Deere's IDR and indicates the minimum level to which JDCC's IDR could fall if Fitch does not change its view on potential support from Deere. An SSR of 'a+' indicates a very high probability of external support being forthcoming.
Credit quality metrics remained solid throughout fiscal year-end 2023 (FYE, Oct. 29, 2023). Delinquencies greater than 30 days past due as a percentage of total receivables were 1.0% at FYE23, relatively unchanged from the prior year. Write-offs, net of recoveries, were 0.1% of average finance receivables in FY23, consistent with the four-year average of 0.1% between FY20-FY23. Fitch believes JDCC's loss reserves, which amounted to 0.3% of total receivables at FYE23, will be sufficient to cover potential losses on receivables in the near term. Fitch expects JDCC's asset credit metrics to remain stable, although slower economic growth or possible recession particularly in the agricultural sector, could pressure credit quality in the medium term.
JDCC's operating performance in 2023 was modestly lower yoy, as income earned on a larger average portfolio was partially offset by less favorable financing spreads, higher provision for credit losses and lower gains on operating lease dispositions. JDCC's pre-tax return on average assets was 1.4% in FY23, down from 1.9% a year ago and below the four-year average of 1.7% between FY20-FY23. Fitch expects JDCC's operating performance to benefit in the coming year given the forecasted reduction in incentive spend. However, a modest decline in overall portfolio receivables and elevated borrowing costs will pose a headwind to positive earnings momentum in the near term.
JDCC's debt-to-tangible equity ratio was 8.6x at FYE23, down from 9.0x the prior year. The incremental decline in leverage was a result of an $810 million capital investment from Deere to help maintain target leverage ratios. Leverage remains consistent with other captive finance peers but higher than many stand-alone finance companies. Fitch expects JDCC's overall capital structure to remain unchanged in the near-term. Should funding requirements increase, Fitch believes Deere would inject commensurate capital amounts into the finance arm, to manage JDCC's overall leverage profile.
JDCC's funding diversity is consistent with other captive finance companies. Approximately 86% of JDCC's debt was unsecured as of FYE23, which is consistent with prior years and is viewed favorably by Fitch, as unencumbered assets provide financial flexibility in times of market stress. Total short-term debt, inclusive of the firm's CP program, amounted to $23.1 billion, or 46% of total debt as of FYE23, which is elevated compared to other Fitch-rated peers. Fitch views the elevated short-term funding profile at JDCC as a modest constraint on the company's financial flexibility. While Fitch believes the firm has sufficient on-and-off balance sheet liquidity to address funding needs should the CP market become uneconomical to access, Fitch would view positively a sustained reduction in the usage of short-term debt.
JDCC's Short-Term IDR is equalized with that of its parent and would be expected to move in tandem with it. JDCC's CP rating is equalized with its Short-Term IDR.
The unsecured debt rating is equalized with the Long-Term IDR, reflecting the firm's largely unsecured funding profile and average recovery prospects for unsecured creditors under a stressed scenario.
John Deere Bank S.A. Luxembourg and John Deere Financial Ltd. Australia are wholly owned subsidiaries of JDCC. JDCC fully guarantees debt obligations of its wholly owned subsidiaries for full repayment, and also guarantees the debt obligations of John Deere Financial Inc. Canada and John Deere Canada Funding Inc. The guarantee is viewed as the strongest form of parental support, which Fitch believes enhances the rating linkages between JDCC and its subsidiaries. As a result, the IDRs and issue ratings of the above-mentioned entities are linked to those of JDCC.
Derivation Summary
Deere is the largest provider of agricultural equipment in the U.S., particularly in the large equipment market, where it competes with CNH Industrial N.V. (CNHI; BBB+/Stable) and AGCO (not rated) and has a significant presence in international markets. Deere is geographically diversified and gains additional diversification from its construction, road-building and forestry equipment businesses.
Deere's profile as a capital goods producer is similar to other manufacturers in the agricultural, construction and heavy-duty truck markets, all of which are subject to demand cycles.
Deere's market positions in turf and construction equipment are competitive albeit smaller than some global competitors such as Caterpillar Inc. (CAT; A+/Stable) and Komatsu (NR).
The company's capabilities and expansion in precision ag and other digital technologies compare favorably with other large, high-rated peers in the diversified industrial and capital goods space and support an expansion of Deere's EBITDA margins.
Deere's significant captive finance business benefits from strong asset quality, and together with a large dealer network, supports the company's competitive position.
Fitch applies its Parent Subsidiary Linkage Rating Criteria for Deere's equipment operations using the stronger parent/weaker subsidiary approach. The linkage between Deere & Company and two equipment subsidiaries, John Deere Cash Management (JDCM) and John Deere Canada ULC, is strong as reflected by Deere's guaranty of debt issued by these subsidiaries, and ratings are equalized. Fitch assesses strategic and operational incentives as high due to Deere's integrated management of its equipment businesses and centralized treasury operations.
Key Assumptions
Sales decline in 2024 from a cyclical peak in 2023;
Operating margins decline in 2024 but increase over time toward Deere's targeted mid-cycle level of 20% by 2030;
FCF margin after dividends is sustained in the high single digits;
EBITDA leverage is near or below the 1x range over the long term but could increase during cyclical downturns;
Financial Services continues to perform well, supporting dividends to Deere; credit quality could see some deterioration when end markets are weak;
Deere maintains a disciplined cash deployment policy and a strong balance sheet, including flexibility around discretionary share repurchases.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
A higher proportion of sales from recurring revenue, parts sales, and non-ag equipment that reduces the variability of Deere's profitability and cash flow;
Mid-cycle EBITDA leverage below 1x, and leverage during downcycles is low, including financial flexibility to manage to peak EBITDA leverage below 1.5x;
Effective risk management and conservative capital funding of the financial services business that reduces the risk of support needed from Deere;
A sustained reduction in usage of short-term debt at the financial services business could support a higher short-term rating for Deere's equipment business.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Loss of significant market share in the company's agricultural, construction and forestry equipment markets;
Mid-cycle leverage is elevated including EBITDA leverage above 1.5x;
Financial Services requires significant support that reduces Deere's liquidity and financial flexibility.
JDCC
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Factors that could, individually or collectively, lead to negative rating action/downgrade include a change in the perceived relationship between Deere and JDCC, for example, if Fitch believed that JDCC was no longer core to Deere's strategic operations and/or adequate financial support was not provided to the captive finance company in a time of need. Additionally, negative rating action could be driven by significant asset quality deterioration; the recognition of consistent operating losses; a material increase in balance sheet leverage; and/or deterioration in JDCC's funding or liquidity profile.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Factors that could, individually or collectively, lead to positive rating action/upgrade would be linked to Fitch's view of Deere's credit profile, as JDCC's ratings and Outlook are linked to that of its parent. Fitch cannot envision a scenario where the captive would be rated higher than its parent.
The unsecured debt rating is equalized with the Long-Term IDR, and would be expected to move in tandem. However, a material increase in secured funding, and/or a material reduction in unencumbered assets could result in a widening of the notching between JDCC's Long-Term IDR and unsecured notes.
The Short-Term IDR is primarily sensitive to changes in the Long-Term IDR and would be expected to move in tandem, and also takes into account JDCC's standalone funding, liquidity and coverage profile. A shift to a longer-term funding profile at JDCC could result in stronger financial flexibility for the parent which could support a higher short-term rating. The CP rating is equalized with the Short-Term IDR and would be expected to move in tandem.
The ratings of John Deere Bank S.A. Luxembourg, John Deere Financial Ltd. Australia, John Deere Financial Inc. Canada and John Deere Canada Funding Inc. are linked to JDCC's Long-Term IDR and would be expected to move in tandem.
Liquidity and Debt Structure
Liquidity at Deere's equipment operations as of Oct. 29, 2023 included cash of $5.7 billion and availability under two $2.5 billion revolvers shared with JDCC that mature in 2027 and 2028. High usage under the facilities primarily represents outstanding commercial paper, largely at the finance business, that is backstopped by the facilities. Deere also has a $5 billion 364-day facility that is shared with JDCC that includes a one-year term-out option. The credit agreements require Deere to maintain certain covenants, all of which were in compliance as of Oct. 29, 2023.
Liquidity is supported by limited funding requirements for pension plans which were 121% funded at the end of fiscal 2023. Deere had approximately $8.4 billion of debt at the equipment operations, including $1.2 billion due within one year, and $63 billion of consolidated debt at Oct. 29, 2023.
Issuer Profile
Deere & Company is the world's largest farm equipment manufacturer. It also makes construction, road building, forestry and turf equipment but has a smaller presence in these markets than in its agricultural business. Deere sells its products through independent dealers and retail outlets. Approximately 39% of equipment sales in 2023 were made to customers outside the U.S. and Canada. Deere provides financing for its customers through its Financial Services segment.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
John Deere Capital Corporation's ratings are linked with its parent, Deere & Company.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
DEERE & COMPANY 
