Fitch Assigns First-Time 'BBB-' Ratings to Land O' Lakes, Inc.; Outlook Stable

Fitch Ratings has assigned long-term Issuer Default Ratings (IDR) of 'BBB-' to Land O' Lakes, Inc. (LOL) and Land O' Lakes Capital Trust I. The Rating Outlook is Stable. A full list of ratings is provided at the end of this release.

KEY RATING DRIVERS

The ratings reflect LOL's significant scale as the second largest U.S. agricultural cooperative (co-op), consistent EBITDA growth and reasonable credit metrics. The company's operations are diversified versus its agricultural peers, with Dairy Foods, Feed, and Crop Inputs each accounting for approximately a third of its revenue. However, Crop Inputs are more profitable so this segment comprises about half of the company's EBITDA. The co-op's long history since 1921, long-term relationships between the grower/owners and co-op, as well as strong brands including Land O' Lakes, Purina Animal Nutrition and WinField Solutions, support the ratings.

The company's competitive market positioning is balanced with its low single digit EBITDA margins of approximately 3%, which Fitch estimates will improve modestly over the forecast period on supply chain efficiency and favorable product mix in dairy and feed. Fitch anticipates LOL's top line will be relatively flat over the intermediate term with moderate periodic volatility due to input cost changes, and EBITDA to grow at a low single digit CAGR.

LOL's capital structure consists of a $575 million secured credit facility due March 2020, $150 million senior secured term loan due August 2021, $325 million in 6.24%-6.77% senior secured private placement notes due 2016 through 2021, $300 million 6.00% unsecured notes due August 2022 and a $500 million receivables securitization facility due March 2020. There are also $200 million junior subordinated capital securities due in March 2028 at Land O' Lakes Capital Trust I. Currently the credit facility, term loan and private placement notes are secured by substantially all of the material assets of LOL and its wholly owned domestic subsidiaries (other than MoArk, LLC, LOL Finance Co., LOLFC, LLC (a subsidiary of LOL Finance Co.) and LOL SPV, LLC). The ratings take into account that the collateral is likely to be released in the near term so the secured credit facility, term loan, and private placement notes will become unsecured.

LOL is a Minnesota-based co-op originally incorporated to meet the needs of dairy farmers in the Midwest. The company has expanded through mergers, acquisitions and joint ventures to a revenue base of $15 billion and EBITDA per Fitch's calculation of approximately $440 million in 2014. Dairy members supply LOL's Dairy segment with milk, cream, cheese and butter. Ag members purchase agricultural products, primarily feed, seed and crop protection products.

As a co-op, high cash patronage payments of its net profits to grower/owners leave LOL reliant on external sources of liquidity, particularly during the period of heightened capex in the $250 million range annually during the next few years. Fitch treats the patronage payouts, estimated to continue at 60% of the prior year's net income, as dividends. Fitch estimates that annual FCF (cash flow from operations less capex and dividends) will continue to be relatively flat on average, with FCF margins of +1% to -1%. Given the lack of materially positive FCF during most years, LOL has historically relied on asset sales proceeds to reduce debt.

LOL's debt agreements contain credit enhancing restrictions that subordinate the majority of patronage payments to debt payments. However, there is a 20% allowed patronage distribution to preserve the co-op's tax status. LOL's effective income tax rate is substantially lower than the statutory federal and state income tax rates as a result of the tax deductibility of qualified patronage distributions made from net income. Also, member/owners have incentive to maintain a relatively conservative capital structure to maintain the financial health of the co-op.

LOL's leverage (total debt to EBITDA) was 2.6x, total adjusted debt to EBITDAR was 3.6x and operating EBITDA/gross interest expense was 6.6x for 2014. Fitch's expects total debt/EBITDA will be approximately flat in 2015 and then improve by approximately half a turn to the 2.0x range in 2016, assuming the $155 million private placement is repaid with cash on hand. LOL's rent expense is significant at approximately $100 million annually, but roughly 40% is comprised of inventory storage fees for its crop inputs business that are very short-term.

KEY ASSUMPTIONS

--Approximately 5% sales decline in 2015 mainly due to lower dairy prices, as well as the remaining MoArk sale. Expect total volumes to be up approximately 1% over the next 24-36 months with inter-period input cost volatility.

--Slight improvement in EBITDA in 2015 and CAGR of about 3% over forecast period. EBITDA margins in the low to mid 3% range.

--Cash payout to members remains at the targeted 60% of prior year net income. FCF margin in the range of + or - 1% of sales after cash payout to members.

--Total debt/EBITDA flat at 2.6x in 2015 and potentially half a turn lower in 2016 and beyond on anticipated debt paydown.

RATING SENSITIVITIES

A negative action could occur if there is a sustained weakness or operating profit decline in one of LOL's key business segments, if total debt to EBITDA is consistently greater than 3x, and FCF after patronage dividends remains negative for multiple years. A Board commitment to a patronage payout materially above 60%, which is currently factored into Fitch's base case projections, could also support a negative rating action.

A positive rating action could occur if LOL diversifies its portfolio towards higher growth and higher margin categories, if leverage is sustained below 2x and the company consistently generates positive FCF. Fitch does not expect a positive rating action in the near term due to the low growth and low margin structure of its business segments.

LIQUIDITY

LOL's liquidity is ample at approximately $860 million at March 31, 2015. Liquidity includes $21 million cash and cash equivalents, which varies seasonally, $552 million available on its $575 million senior secured revolver and $287 million available on its $500 million receivables facility. Credit facility availability was reduced by $23.5 million LOCs. Seasonal working capital needs are highest during the first and third quarters and trough to peak liquidity varies by approximately $900 million. The co-op's next significant maturity is $155 million private placement notes due in Dec. 2016, which Fitch expects will be paid down with cash on hand.

FULL LIST OF RATING ACTIONS

Fitch has assigned the following ratings:

Land O' Lakes, Inc. (LOL)

--Long-term IDR 'BBB-';

--Senior secured credit facility 'BBB-';

--Senior secured term loan 'BBB-';

--Senior secured private placement notes 'BBB-';

--Senior unsecured notes 'BBB-';

Land O' Lakes Capital Trust I

--Long-term IDR 'BBB-'

--Junior subordinated capital securities 'BB.'

The Rating Outlook is Stable.

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985397

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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