S&P: United Agri Products on watch

Standard & Poor's said it placed its ratings for United Agri Products Inc. on CreditWatch with negative implications.

United Agri Products Inc.'s corporate credit is rated B+, senior secured credit facility is rated BB-, and senior unsecured debt is rated B.

S&P said the CreditWatch placement follows the recent S-1 filing by UAP Holdings Corp. (the parent company of United Agri Products) stating that the company plans to issue about $625 million in income deposit securities and subsidiary guaranteed senior subordinated notes.

Based on its preliminary review, S&P said it believes that the IDS structure, in general, exhibits a more aggressive financial policy than factored into the current rating.

Though the amount of the consolidated company's debt outstanding would change little after the IDS offering, UAP will have significantly reduced its financial flexibility given the anticipated high dividend payout rate. As a result, the structure limits the company's ability to withstand potential operating challenges and also reduces the likelihood for future deleveraging.

A further risk is that the debt portion of the IDS may not be treated as debt for U.S. federal income tax purposes by the IRS. If all or a portion of the subordinated notes are treated as equity rather than debt, then the interest on the subordinated notes will not be deductible by UAP. This could make the IDS securities uneconomic and expose UAP to refinancing risk and a claw-back of prior years' liability (there is generally a three-year limit on such a claw-back).

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