Moody's rates UAP

Moody's Investors Service said it assigned a Caa3 rating to UAP Holding Corp.'s planned $320 million issue of guaranteed senior subordinated notes and a B2 rating to the United Agri Products' planned $150 million second lien senior secured term loan due 2011.

Moody's also assigned a senior implied rating of B3 and a senior unsecured issuer rating of Caa2 to UAP Holding (previously these ratings were assigned to United Agri Products). Ratings confirmed include United Agri Products' $500 million guaranteed senior secured revolver due 2008 at B1.

The ratings on the UAP discount notes ($82.5 million - rated Caa2) and the United Agri Products notes ($225 million - rated B3) remain on review for possible downgrade but will be withdrawn upon conclusion of the planned refinancing and IDS transaction.

The new debt issues are part of a recapitalization and partial sale of the company through an initial public offering of Income Deposit Securities, which represent linked shares of class A common stock and senior subordinated debt. Contemporaneous with the IPO, UAP's current owner, Apollo Management LP, will exchange its remaining equity interest for about $147 million of convertible preferred stock (not rated) of UAP that receives a blended dividend equal to the IDS units and converts into IDS units under certain conditions.

Moody's said the ratings consider that UAP's historical cash flow from operations has fluctuated significantly because of swings in working capital despite relatively stable EBITDA, though recognizing that the company is taking steps to reduce this volatility. The ratings also reflect the company's thin, albeit reasonable for an agricultural distributor, fiscal 2004 EBITDA margins of 5.1%; agricultural market risks including the seasonality of sales; the influence of weather; the affect of government subsidies on farm planting decisions; UAP's significant operating leases; and the highly competitive nature of its markets.

The ratings are supported, the agency noted, by the company's entrenched position as the leading supplier of agricultural inputs (chemicals, fertilizers, and seeds) in the United States and Canada, its significant scale with $2.45 billion of fiscal 2004 revenues, long-standing relationships with key agricultural input suppliers, modest capital expenditure requirements, and its growing sales of higher-margin private label products.

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