Investing.com -- Moody’s Ratings has confirmed the Baa2 senior unsecured rating of AGCO Corporation, including its wholly owned subsidiary, AGCO International Holdings B.V. However, the outlook has been revised to negative from stable.

This change in outlook is due to the anticipated further weakening of demand for agricultural equipment in 2025. This is expected to reduce AGCO’s EBITA margin below 6% and increase the debt-to-EBITDA ratio near 4x.

The negative outlook also takes into account the potential for a prolonged end market recovery due to persistently low commodity prices in a high interest rate environment. Additionally, the impact of tariffs on agricultural equipment is currently uncertain, but a prolonged trade war could further depress demand and hinder the company’s ability to improve operating results.

AGCO’s ratings are supported by its strong position in the global farm equipment market, particularly in Europe. The company benefits from positive long-term trends in the agricultural sector, such as a growing global population and increased need for food production. Additional factors include demand for vegetable oil-based fuels for clean energy initiatives and the need to improve farming productivity due to extreme weather conditions and resource scarcity.

AGCO’s 2024 debt-funded joint venture with Trimble has expanded the company’s precision farming capabilities, complementing its technology-focused Fendt and FUSE product lines. Trimble’s technology, which is compatible with all brands of equipment, is expected to increasingly contribute to AGCO’s results as its penetration expands in late 2025 and beyond.

Despite the challenging market conditions, AGCO has made significant progress in improving its cost structure and adding resilience to earnings. The company’s strategy to extend production cuts through the first half of 2025 in response to falling commodity prices, high interest rates, and growing macroeconomic concerns is expected to impact profitability this year. However, solid pricing, growth in higher margin parts and service revenue, and continued Fendt market share gains in North and South America are expected to offset some of this impact.

AGCO’s liquidity remains strong, with expected cash reserves of around $500 million and almost full availability under its $1.25 billion revolving credit facility expiring in December 2027. Free cash flow in 2025 is projected to be at least $200 million, boosted by ongoing efforts to reduce inventory. This is expected to increase modestly in 2026 as production normalizes.

The ratings could be upgraded if the EBITA margin remains above 15%, debt-to-EBITDA stays below 2x, and free cash flow-to-debt is expected to approach 15%. Greater earnings resilience to weaker agriculture equipment demand cycles would also be viewed favorably. Conversely, the ratings could be downgraded if the EBITA margin stays below 10% and debt-to-EBITDA remains above 3x. An inability to demonstrate significant progress in improving EBITA-to-interest toward high single digits could also result in a downgrade. Increased vulnerability to ag industry downturns or a more aggressive financial strategy could also lead to a negative rating action.

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