Fitch Ratings Affs Rtgs Of Deere, John Deere Capital At 'A/ F1'

Business Wire, May 24, 2002

Business Editors

CHICAGO--(BUSINESS WIRE)--May 24, 2002

Fitch Ratings affirms the senior unsecured long-term debt and commercial paper ratings of Deere & Co. (Deere) and its subsidiaries, including John Deere Capital Corp. (JDCC) at 'A' and 'F1'. Also, JDCC subordinated debt is affirmed at 'A-'. The ratings are based on Deere's superior and expanding market positions across its agricultural product lines, high degree of liquidity, and the benefits to the company's credit profile provided by its ownership of JDCC. Risk factors include the continuing slump in the U.S. agricultural market and the decline in Deere's non-agricultural businesses, particularly the continuing losses in the company's construction and forestry business. Financial ratios are weak for the rating category, and the Rating Outlook remains Negative. A full list of the ratings covered is provided below. Fitch's action covers approximately $13.5 billion of Deere's and its subsidiaries' debt outstanding at 4/30/02.

Deere remains the pre-eminent global manufacturer of agricultural equipment and has further enhanced its competitive position during the extended downturn in the agricultural market. A steady stream of new product introductions, technological advances, and a relatively stable dealer network have led to continuing share gains. Restructuring actions, cost reductions and increased focus on asset efficiency have led to operational improvements that, along with the company's operating leverage, provide substantial upside potential upon any improvement in the agricultural market. Performance in Europe has been strong recently, and remains a key area of opportunity over the near term.

Deere's construction equipment segment has suffered from the steep dropoff in demand from the rental market, which had accounted for a significant portion of the segment's growth in 1999 and 2000. This market is expected to show little improvement in the short term. Deere has pursued a number of restructuring actions in this segment, although Fitch expects that operating losses will persist. Over the long term, Deere's construction sector faces issues in the form of product breadth, the strength of its distribution network versus competitors such as Caterpillar, and ever-present, intense price competition. Product and distribution scale continue to be critical factors in the evolution of the industry, and along with Deere's increased focus on asset efficiency, could lead to Deere taking additional steps in this sector. Fitch expects that further product and distribution alliances could occur to address these issues.

Liquidity is very strong at the equipment operations, with cash holdings of approximately $2.7 billion as of 4/30/02, versus total debt of approximately $3.8 billion. Net debt figures (excluding the sale of wholesale receivables to JDCC) have meaningfully declined from the prior year period that had been inflated by acquisition activity in the 1999-2000 period, primarily due to working capital reductions. Production cutbacks over the last three quarters have led to a reduction in inventories (as of 4/30/02) of more than $360 million versus the prior year. Recent refinancing activity has left Deere with cash holdings that exceed consolidated commercial paper outstanding, with very little commercial paper outstanding at the equipment operations. Debt maturities at the equipment operations are minimal over the next several years.

In large part, the cash portfolio resulted from the sale of wholesale receivables to JDCC. This has led to increased consolidated debt levels, but has provided Deere with significant liquidity that is now predominantly invested externally. Fitch's methodology views these receivables as an integral part of Deere's operations, and thereby places the receivables back on Deere's balance sheet. The associated financial charges are already incorporated in Deere's income statement. Unwinding the receivables sale would still leave Deere with a very significant cash portfolio.

Financial measures have been weak for the rating due to poor economic conditions across the company's end markets. Additionally, significant production cutbacks in the fourth fiscal quarter of 2001 and the first fiscal quarter 2002 to reduce inventory levels further impaired cash generation measures. This led to negative EBITDA in those quarters, offset by liquidity provided by reductions in inventories and receivables (excluding the impact of the sale of wholesale receivables). Second quarter 2002 results showed a substantial rebound in cash generated from operations, as Deere enters its peak selling season and as production was restored to levels approaching retail sales. The construction and forestry sector, however, continued to post operating losses. Industry inventories remain low, particularly in the agricultural sector, providing significant operating leverage upon any improvement in end demand.

JDCC lends some stability to Deere's credit rating. Established to help facilitate the sales of Deere equipment, JDCC has evolved into a source of consistent earnings to the parent through an entire economic cycle. Given the importance of JDCC and its subsidiaries to the success of Deere's equipment placement and the existence of an operating agreement governing the relationship between the two entities, the ratings are linked. Fitch views JDCC as a conservative lender that operates with a moderate amount of leverage. Net charge-offs for the owned receivables portfolio have remained within a very narrow range over the last six years topping out at 74 basis points in fiscal 2001. Asset quality measures weakened in the second quarter due to losses on transactions related to two international finance companies that are affiliates of each other. Additionally, Fitch expects that leverage at fiscal year-end 2002 may modestly increase over fiscal year-end 2001 as JDCC leverages the purchased Deere wholesale receivable portfolio to targeted levels. Neither of these events are expected to have a material impact on JDCC's risk profile.