UPL Corp. Ltd. 'BBB-' Ratings Affirmed On Completion Of Arysta Acquisition; Outlook Stable

  • We believe UPL Corp.'s recently completed acquisition of Arysta will strengthen the UPL group's global market share in agrochemicals.
  • On the other hand, the mostly debt-financed transaction has increased UPL. Corp's leverage.
  • On March 14, 2019, we affirmed our 'BBB-' issuer credit rating on UPL Corp. At the same time, we affirmed our 'BBB-' rating on the company's senior unsecured notes.
  • The stable outlook reflects our expectation of a successful integration of Arysta and a rapid deleveraging from elevated post-deal levels over the next 24 months.
SINGAPORE (S&P Global Ratings) March 14, 2019--We affirmed our rating and 
outlook on UPL Corp. Ltd. (UPL Corp.) because we believe the UPL group's 
global market share and diversity will strengthen following the completion of 
Arysta LifeScience Inc.'s acquisition. Against this, however, the additional 
debt incurred to fund the acquisition weighs on the group's improved business 
position.

Our affirmation reflects our view on UPL Corp.'s India-listed parent UPL Ltd. 
(UPL). While UPL's ownership drops to 78% from 100% after the acquisition, we 
still consider UPL Corp. as an inseparable part of UPL. We therefore equate 
the rating on UPL Corp. with our group credit profile assessment of its 
parent. 

We estimate UPL's ratio of funds from operations (FFO) to debt will weaken to 
20% in fiscal 2020 (ending March 31, 2020), from about 40% in fiscal 2018. We 
expect the FFO-to-debt ratio to strengthen closer to 30% by fiscal 2022, as 
the company integrates the large acquisition and generates synergies over the 
next two to three years.

UPL's global ranking in agrochemicals should climb to fifth place from seventh 
due to the acquisition, putting it slightly ahead of FMC Corp. 

In our view, the acquisition enhances UPL's competitive strength in the global 
sphere, amid increased industry consolidation and tough operating 
environments. The integrated business markedly increases UPL's revenue by 
70%-80% to about US$5 billion starting in fiscal 2020.

Arysta was the agricultural solutions segment of U.S.-headquartered Element 
Solutions Inc., earlier known as Platform Specialty Products Corp. Its 
stronger presence in Europe will add to UPL's global diversity. We estimate 
UPL's European market share will improve to 24% post-acquisition, from 13% 
previously, while the share of Latin America at 34% and North America at 16% 
will broadly remain unchanged.

In terms of product mix, we expect the revenue breakdown of herbicides, 
fungicides, and insecticides to stay roughly in line. We do not see a major 
overlap between Arysta and UPL's product portfolio, which could provide 
significant cross-selling opportunities in future. Agrochemical customers are 
somewhat sticky and UPL could leverage on the strengths of Arysta's customer 
profile.

We also see UPL benefitting from Arysta's strong research-led product 
portfolio and synergies from in-house manufacturing of Arysta's products. 
Prior to the acquisition, Arysta had a 100% outsourced manufacturing model.

In our view, UPL is likely to maintain an appetite for acquisition-led growth. 
At the same time, we believe the company remains committed to maintaining an 
investment-grade credit rating and will avoid transactions that could trigger 
a downgrade.

UPL Corp. completed the purchase of Arysta for US$4.2 billion on a cash-free, 
debt-free basis on Jan. 31, 2019. The acquisition was financed by a US$3 
billion five-year term loan from a consortium led by MUFG Bank Ltd. and 
Cooperatieve Rabobank U.A. It also included a US$1.2 billion equity issuance 
by UPL Corp. Post-acquisition UPL's ownership in UPL Corp. drops from 100% to 
78%. The remaining stake is now owned by the sovereign wealth fund Abu Dhabi 
Investment Authority, and private equity firm TPG Capital. We believe UPL will 
continue to retain significant control of UPL Corp.

The stable outlook on UPL Corp. reflects our expectation that leverage will 
fall to a sustainable level as the acquisition is absorbed, with the ratio of 
FFO to debt recovering to above 25% within the next 24 months. We expect this 
to be driven by steady growth and stable margins of 19%-21% over the period, 
and barring any further outsized debt-funded acquisitions.

We may downgrade UPL Corp. if weak operating conditions, higher competitive 
intensity, or integration risks result in deteriorating profitability and 
higher leverage. This could be indicated by the parent's EBITDA margin falling 
below 15%, or the FFO-to-debt ratio not recovering above 25% sustainably. 
Leverage could also rise if the company or its parent uses free cash flow and 
increases debt for acquisitions or outsized shareholder distributions.

We could upgrade UPL Corp. if faster-than-expected revenue growth and 
profitability results in sustainably lower leverage at the parent level. UPL's 
ratio of FFO to debt approaching 40% and the company committing to lower 
leverage would indicate such improvement. Any upgrade is contingent upon UPL 
maintaining sufficient liquidity even in a hypothetical sovereign stress 
scenario.

UPL Corp. is a majority owned subsidiary of India-listed UPL, which is the 
world's fifth largest crop-protection company. UPL's product portfolio covers 
the entire agricultural value chain, including seeds, seeds treatment, crop 
protection, storage of agricultural products, as well as post-harvest 
solutions.