Deere, John Deere Cap ECNs Rated F1; Other Debt Affirmed

Business Wire, Oct 11, 1999

NEW YORK--(BUSINESS WIRE)--Oct. 11, 1999--

Deere & Company's (Deere) and John Deere Capital Corp.'s (JDCC) extendible commercial notes (ECNs) are both rated `F1' by Fitch IBCA.

The commercial paper rating for both companies is affirmed at `F1' and respective senior debt ratings at `A'. Both Deere and JDCC may each issue up to $1 billion of ECN's.

The ratings reflect Deere's strong market positions in its key product lines, supported by robust new product flow, as well as its increasingly balanced business portfolio. Deere remains the world's premier agricultural equipment producer, holds strong market positions in construction and forestry equipment, and is a leading manufacturer of commercial and consumer equipment, a rapidly growing business.

From its solid market foundations in North America and Europe, Deere is expanding its footprint in emerging markets in Latin America and Asia, where demand for agricultural machinery has favorable long-term fundamentals despite near-term uncertainties. Deere's consistent new product spending is supporting a rapid flow of new products to maintain growth and enhance market shares.

Despite these solid internal fundamentals, Deere's financial performance has weakened materially over the last four quarters because of the severe downturn in the North American farm economy. This sector remains depressed due to low worldwide agricultural and commodity prices, bumper North American crops, and an overall slowing in world grain demand.

Agricultural equipment sales have fallen sharply, as farmers have curtailed spending on new machinery, particularly high margin items such as tractors and combines. A weakening tempo in North American construction markets has also served to slow sales in that segment, as has Deere's lower production as it implements its build to order `Estimate to Cash' program.

Diminished sales in these key segments have translated into a sharp decline in EBITDA (earnings before interest, taxes, depreciation and amortization), to $627 million for the 12 months ended July 31, 1999, from $1.5 billion in the fiscal year ended Oct. 31, 1998. Consequently, credit protection measures have weakened considerably. Leverage in the equipment operations, defined as total debt/EBITDA, increased to 3.79 times (x) at July 31 1999, from 1.35x at Oct. 31, 1998.

Similarly, EBITDA interest coverage fell to 4.03x from 11.9x over the same time period. In this difficult period, Deere reduced production schedules to lower dealer inventories and pare receivables by $500 million, resulting in improved cash flow. Despite the impact of this cyclical downturn, Deere's recent performance is markedly improved from its experience in the last farm recession because of substantial cost takeouts and better balance in the business portfolio. These ongoing cost and working capital reduction actions, together with new product flows, will put the company in a favorable position once the cycle begins to turn.

Longer term rating concerns include the maturity in Deere's key geographic markets and intense competition in its traditional segments, heightened by the pending acquisition of Case by New Holland. Deere will also be challenged as it expands its business franchise in new markets, as its competitors continue to do the same. Despite these challenges, Deere will continue to concentrate on internal improvement and process-excellence, while committing resources to grow its non-farm businesses to achieve further balance in its portfolio and strengthen platforms for future growth.

In light of JDCC's mission and the existence of an operating agreement with Deere, its ratings are closely linked with those of its parent. JDCC's ratings also reflect its sound asset quality, consistent profitability, and good capitalization. Rating concerns are centered on the increased competitive pressure from banks and other finance companies, which has resulted in margin compression, and the long-term performance of the non-Deere finance business.

Deere & Company, headquartered in Moline, Ill., is a major producer of agricultural, construction and commercial/consumer machinery, as well as diesel engines and service parts. The company's financial services include credit and health care subsidiaries. Deere sells its equipment primarily through a worldwide network of 3,000 independent dealers, of which 1,700 are in North America.

JDCC, with nearly $9.0 billion in managed receivables as of July 31, 1999, provides retail, and to a lesser extent, wholesale and lease financing of Deere's agricultural products, as well as retail and wholesale financing of Deere's construction and commercial and consumer related products.