Bloomberg News

Viterra Bonds Erase Gains on Shareholder Rebuff: Canada Credit

November 07, 2011

Nov. 7 (Bloomberg) -- Viterra Inc.’s bond spreads are widening as investors lose confidence that the Canadian grain handler’s board can guide its expansion against a handful of global competitors such as Cargill Inc.

The extra yield investors demand to own the three Viterra bonds in Bank of America Merrill Lynch’s Canadian Industrial index instead of government debt has risen 8 basis points this quarter through Nov. 2. Viterra is the index’s fifth-worst performer, and its rivals have seen their spreads narrow.

Viterra, based in Regina, Saskatchewan, faces larger competitors including Cargill, Bunge Ltd. and Archer-Daniels- Midland Co. as it prepares to expand in its domestic market. Alberta Investment Management Corp., the investor of the province’s public-sector pensions known as AIMCo, said Nov. 1 the company needs a board of directors that can help it reach its “long-term potential.”

“AIMCo is not something to ignore,” said Steven Hansen, an analyst at adviser firm Raymond James Financial Inc. in Vancouver. “They believe Viterra should have a strong board with a skill set that matches the complexity of the company.” Aimco wants board members with international agricultural industry experience, he said.

Until the AIMCo statement, Viterra bonds were the quarter’s best performers in the 50-member Canadian Industrial index, helped by legislation introduced by Prime Minister Stephen Harper’s government to end the Canadian Wheat Board’s monopoly on marketing wheat and barley. Viterra was formed in 2007 when Agricore United was acquired by Saskatchewan Wheat Pool, a provincial grain-trading cooperative similar to the Wheat Board.

Opportunity for More

The end of the Wheat Board gives Viterra “an opportunity to do more business and make more money,” said Anil Passi, a credit analyst at DBRS Ltd. in Toronto, which rates Viterra BBB (low), the lowest investment grade, with a stable outlook. “A lot depends on the details and the tactics to determine the ultimate financial implications” of the legislation.

Under the proposed law, farmers in the world’s second- largest grain exporter would be able to sell their wheat and barley to private companies for the first time in more than 70 years. Viterra already has “a lot of the infrastructure,” giving them a head start, said Passi.

Standard & Poor’s rates Viterra’s debt BBB-, the lowest investment grade, with a stable outlook. The company has C$1.1 billion ($1.08 billion) in outstanding notes, according to Bloomberg data.

Note Auction

Elsewhere in credit markets, Canada will sell C$3.5 billion of 1 percent bonds due on February 2014 on Nov. 9, according to a statement on the Bank of Canada’s website. The previous auction of two-year bonds, on Oct. 19, drew an average yield of 1.097 percent and a bid-to-cover ratio of 2.38, versus a five- auction average of 2.47, Bank of Canada data show.

Canada’s two-year bonds rallied last week, sending the yield 16 basis points lower, the most since the week ended Sept. 23. Yields ended the week at 0.93 percent, down from as high this year as 1.96 percent on Feb. 15. The spread between yields on two-year Canada government bonds and U.S. Treasuries of the same maturity narrowed about 9 basis points to 71 last week.

The extra yield demanded by investors to hold Canadian corporate debt instead of government bonds narrowed 5 basis points from a week earlier to 173 basis points, or 1.73 percentage points, according to Bank of America Merrill Lynch data. Yields were 3.42 percent on Nov. 4, a drop of 24 basis points on the week.

Relative Returns

Canadian corporate bonds have gained 0.22 percent since September, compared with a drop of 0.1 percent for Canadian government bonds and a loss of 0.16 percent for U.S. Treasuries. For the year, Canadian corporate bonds have returned 6.4 percent, compared with 7.7 percent for Canadian governments and 8.6 percent for U.S. Treasuries.

Viterra’s debt deserves a rating five levels higher than S&P’s BBB-, according to data compiled by Bloomberg that uses metrics including interest expense, cash flow, stock price and credit-default swaps.

“The long-term fundamentals and growth prospects for both the industry and Viterra remain favorable,” S&P credit analysts Donald Marleau and Lori Harris wrote in a note to investors on Sept. 2.

“Viterra is in the best position in the industry irrespective of how grain is marketed,” Marleau said in an interview.

Bunge’s six U.S. dollar-denominated notes worth $2.53 billion on a Merrill bond index of food and drug companies have narrowed 5 basis points to 286 points, while Archer-Daniels- Midland’s seven notes valued at $4.37 billion have narrowed 36 points to 108 and spreads on Cargill’s seven bonds on the same index have narrowed 12 points to 151 points this quarter.

Wheat Board

Canada’s Wheat Board was established in 1935 to help farmers market wheat and barley. The board buys crops from grain farmers mainly in the provinces of Manitoba, Saskatchewan and Alberta and organizes shipments to ports through cars allocated on Canadian railways.

Viterra will consider opportunities “in grain handling, processing and agri products such as fertilizer and retail agri products,” Mayo Schmidt, chief executive officer, said Oct. 21 in a telephone interview from Calgary. The company also manufactures food and animal feed and provides retailing and financial services to farmers.

The company bought Australia’s ABB Grain Ltd. in 2009 and may continue to make purchases as the industry consolidates, said S&P’s Marleau and Harris.

“We view favorably acquisitions that increase diversification or enhance competitive positioning, as well as partially shelter the company from adverse weather or competitive conditions in western Canada,” they said in the Sept. 2 note.

Viterra is Canada’s largest agribusiness with annual revenue of more than C$8 billion.

--With assistance from Chris Donville in Vancouver, Frederic Tomesco in Montreal and Chris Fournier in Halifax. Editors: Paul Badertscher, Dave Liedtka

To contact the reporter on this story: Jeremy van Loon in Calgary at

To contact the editor responsible for this story: David Scanlan at

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