Arysta deal: Fitch, S&P downgrade UPL, but stock soars 15%

Despite the rating downgrades of UPL Corporation by Fitch and S&P after the announcement of its plans to acquire Florida-based agrochemicals player Arysta LifeScience for USD 4.2 billion in a leveraged buyout, the parent UPL's stock rallied 15 per cent today.

While Fitch today revised the rating outlook on the Mauritius-based firm to negative from stable, S&P downgraded the same to stable from positive over the weekend.

But Fitch has affirmed its long-term foreign-currency issuer default rating at BBB-.

In spite of the double downgrades, the market lapped up the news and UPL stock rallied to touch an intra-day peak of Rs 639.65, before closing 14.8 per cent higher at Rs 631.65 on the BSE, against a 0.61 per cent rise in the Sensex at 36,718.60, its highest closing ever.

Fitch said the rating on UPL Corp, which is the international subsidiary of UPL, is based on the consolidated profile of parent UPL.

"The negative outlook reflects the increase in UPL's leverage after the Arysta deal for USD 4.2 billion from Platform Specialty Products Corp, and uncertainty whether UPL will be able to deleverage so as to not exceed our thresholds for considering negative rating action," it added.

The Aryasta acquisition will be financed with around USD 3 billion of debt and USD 1.2 billion of equity inflow from the sale of around 22 per cent stake in UPL Corp to sovereign wealth fund Abu Dhabi Investment Authority and TPG Capital.

"With Arysta, we expect UPL to become the world's largest post-patent player globally, to almost double its FY18 pre-tax profit, and to add Arysta's research-based differentiation to its cost advantage," Fitch said.

It estimates UPL's adjusted debt to leverage to rise temporarily before declining to around three times by FY21, a level that is reasonable for its rating in light of a significantly better business profile.

"But the rate of deleveraging will depend on it unlocking significant cost and revenue synergies through successful integration, and broader industry fundamentals," it said.

Meanwhile, in a weekend note, S&P Global Ratings also revised downwards its outlook on the agrochemicals company to stable from positive.

"At the same, we affirm our BBB- long-term issuer credit rating on UPL Corp. We also affirmed our BBB- long-term issue rating on the company's senior unsecured notes,"it said.

The outlook revision is due to the fact that the agency expects UPL' leverage to rise if it completes the acquisition. "By our estimates, UPL Corp's leverage would double just after the deal, but then markedly improve over the next two years," it said.

But it considers the acquisition to be a strategic fit for UPL's fast-growing agrochemicals business, and would bolster its business position as the world's largest post- patent agrochemicals producer.

"We expect UPL Corp's annual revenues to exceed USD 4.7 billion when combined with Arysta's," the agency said.

It expects UPL's pro-forma ratio of funds from operations to debt to decline to below 20 per cent in FY19. "This compares to our estimate of more than 45 per cent without the acquisition. We believe the higher leverage significantly diminishes the chances of an upgrade over the next 12-24 months, despite a stronger business position," it added.