Deere Issues Record Debt

Yield on company's notes declines even as profit falters.

Deere & Co. is selling more debt than at any time in its history, exploiting demand from investors who are charging unprecedented low interest rates even as the world’s largest maker of farm equipment said it won’t be as profitable as forecast.

A $1 billion offering yesterday from Deere’s finance unit of three- and five-year notes at its lowest coupons brings its 2012 issuance to $7.35 billion, exceeding the total in any previous year, according to data compiled by Bloomberg. Average yields on the company’s bonds fell even after Deere said net income in the year ending Oct. 31 will be $250 million less than a May estimate.

Deere is boosting debt sales as it contends with slowing revenue in Asia and Latin America that threatens to undermine Chief Executive Officer Sam Allen’s goal of reaping at least half its revenue from outside the U.S. and Canada by 2018. Equity investors are paying the least for the Moline, Illinois-based tractor maker’s sales since November 2009.

“You have slower growth but you still have growth, and so from a credit metric perspective the company still looks solid,” Jeffrey Cannon, an analyst at Chicago-based Morningstar Inc., said in a telephone interview. “It’s a great time to issue debt because rates are low and spreads are tight.”

John Deere Capital, which issues obligations to help finance the sale of the parent company’s equipment, sold equal $500 million portions of 0.7 percent notes due in 2015 that yielded 42 basis points more than similar-maturity Treasuries and 1.2 percent bonds maturing in 2017 with a 62 basis-point spread, Bloomberg data show. The coupons were the lowest ever among its similar-maturity fixed-rate bonds.

“Deere had significant debt maturities to refinance this year in addition to growth in the credit portfolio,” Ken Golden, a spokesman at Deere, said in an e-mail. Deere is ranked A2 by Moody’s Investors Service, its sixth-highest level, and an equivalent A by Standard & Poor’s.

Average yields of 1.74 percent on $14 billion of outstanding Deere obligations compare with 1.79 percent among industry peers and 2.63 percent for similarly rated corporate borrowers, according to Bank of America Merrill Lynch index data. Deere bonds yielded 1.85 percent on Aug. 14, a day before the company reported third-quarter profit that failed to meet analyst estimates, its first miss in 11 quarters.


Seeking Yield

Demand for corporate bonds is rising as investors seek the extra yield offered by company debt relative to the declining rates on government securities. That’s helped push borrowing costs on U.S. investment-grade bonds to a record low 2.98 percent as of Aug. 31, Bank of America Merrill Lynch index data show.

“Investors are seeing safety in high quality credit names, like Deere, and are also looking for any incremental yield in an environment of extremely low yields,” Alan Shepard, an analyst at Madison, Wisconsin-based Madison Investment Holdings Inc., which oversees about $16 billion and holds Deere bonds, said in an e-mail message.

Net income this year will be $3.1 billion, down from a May forecast of $3.35 billion, Deere said in an Aug. 15 statement. After rising 15 percent this year, revenue may increase at a 4 percent pace in 2013, the slowest since declining in 2009, according to analyst estimates compiled by Bloomberg.

Deere’s Allen is targeting developing economies such as Argentina and India as the company aims for $50 billion in annual revenue by 2018. Deere generated $32 billion in sales last year, 39 percent of which came from outside the U.S. and Canada, Bloomberg data show.

Asia sales will drop “moderately” in the full year because of “softening” in India and China while South American sales will be 5 percent to 10 percent lower this year, according to the third-quarter earnings statement.

Even as investors seek the corporate obligations of Deere, its shares have dropped 7.5 percent since Aug. 14 to $74.12 yesterday. A price-to-sales ratio of 0.86 as of Aug. 28 has declined from 1.16 in January, Bloomberg data show.

“Equity investors are more motivated by the future growth prospects” that have deteriorated, Shepard said.

Deere’s bond offerings this year account for 13 percent of the $55 billion of dollar-denominated debt the company has issued since 1973, Bloomberg data show. Deere & Co. accounts for about $8.5 billion of the company’s $31 billion of total debt; its John Deere Capital unit has $19.9 billion.


Average Maturity

The company has pushed out the length of its debt, with a $1.25 billion sale of 3.9 percent securities due in three decades helping to extend the average maturity of its obligations to 5.72 years, from 3.96 years in 2011.

The 3.9 percent notes were part of a $2.25 billion offering in June, the parent company’s first debt sale since 2009, Bloomberg data show. Proceeds from that sale were to be used for working capital and other general corporate purposes, the company said in a regulatory filing in June.

“Deere, like other high-quality issuers, is taking advantage of near-perfect issuance conditions to improve its funding structure despite some short-term challenges to its sales and earnings growth,” Carol Levenson, director of research at Chicago-based Gimme Credit LLC, said in an e-mail message.

While profit expectations were lowered from the second-quarter outlook, the most recent forecast would still amount to an 11 percent increase from 2011 and a third-straight year of rising profit, Bloomberg data show.

“Deere is a high-quality credit with a track record of impeccable financial policies,” Kristina Regan, an analyst at CreditSights Inc. in New York, wrote in a report last month. “Credit metrics still remain solid for the ratings tier and at the top of management’s cash priorities is maintaining Deere’s strong ratings.”



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