Brazil Soy Ruling Overmatched By
Monsanto's Solutia Woes

MARA LEMOS / Dow Jones News Wires 20aug03

[More on Monsanto]

NEW YORK—The prospect of Brazil lifting its ban on genetically-modified crops is unlikely to ease the pressure on Monsanto Co.'s (MON) credit profile, because of litigation issues overhanging the company regarding its former Solutia Inc. (SOI) unit.

Chemical company Solutia was found liable in 2002 for polluting parts of Anniston, Ala., and nearby areas with polychlorinated biphenyls, or PCBs. It has, so far, faced damage awards of more than $100 million.

Earlier this week, Solutia said in its quarterly report that it's considering all alternatives, including a potential reorganization under Chapter 11 bankruptcy, to address its future liquidity needs.

Solutia was spun off from Monsanto in 1997. The rest of Monsanto merged with Pharmacia & Upjohn in 2000. Monsanto was then spun off from that company in 2002, with Monsanto agreeing to indemnify Pharmacia from legal liabilities related to Solutia, if the latter proves to be unable to fund these liabilities.

Citing Monsanto's exposure to Solutia's legal liabilities, Standard & Poor's earlier this month revised its outlook on Monsanto's single-A long-term rating to negative from stable. S&P also lowered its short-term and commercial paper ratings on the company to single-A-2 from single-A-1. About $1 billion in debt was affected, S&P said.

By contrast, Moody's Investors Service, which rates Monsanto the equivalent of two notches lower than S&P at Baa1, reaffirmed its rating for the company's senior unsecured debt after its second quarter results came in stronger than expected this month.

Moody's also kept its stable outlook for the credit untouched, but analyst John Rogers said that the situation with Solutia is being closely monitored.

"Solutia will be the overriding credit issue for a while," said Rogers. "It looks like it could be even larger than we thought, but it seems manageable."

Solutia, Monsanto and Pharmacia were sued by about 3,500 residents who lived near a now-closed PCB-manufacturing plant in Anniston that was run by Monsanto.

The Soys From Brazil

Monsanto's litigation risk overshadows any potential gains in its credit profile from increased use of Monsanto's modified seeds at the world's second largest soybean grower after the U.S., said analysts.

Still, credit analysts greeted with cautious optimism the news that a Brazilian federal judge last week lifted a ban dating from 2000 preventing Monsanto from marketing its Roundup-Ready soybean seeds.

The preliminary ruling remains subject to review by two other judges on an appeals panel that could yet reverse the decision that favors Monsanto.

"If upheld, the ruling in Brazil is a modest positive for Monsanto, but one of many that need to happen worldwide to create any upward driver on credit quality," said Peter Kelly, an analyst at S&P.

Also, environmentalists and consumer groups will likely challenge the ruling, so even a swift ruling allowing altered crops wouldn't help Monsanto in the near-term, said Michael Zbinovec, an analyst with Fitch Ratings in Chicago. Fitch assigns a single-A-minus rating to Monsanto, and holds its credit outlook as stable.

Owing to the long-standing ban, the company doesn't have enough Roundup Ready beans to supply the farmers in Brazil before planting of the new crop begins in earnest from September, Zbinovec added.

Monsanto officials weren't available to comment.