Consistent with other Australian corporates, Nufarm posted solid results for the 2016 financial year from strong cost optimisation rather than increased product demand as underlying EBITDA rose by 17.2% to $372 million despite only a 2% increase in revenue. However, underlying net profit after tax was hit by the group’s emerging market operations (down 7%) as volatile economic conditions resulted in a sharp increase in interest expense and foreign exchange losses (total cost increase of $63 million). Net debt increased 14% to $625 million driven primarily by one-off items and adverse foreign exchange movements. As a result, gearing ticked up by 3.7% to 28.7% but should retrace partially (~27%) following scheduled asset divestments. Nufarm is majority owned by Sumitomo Chemical Company (23%) and Zhang Hua (chairman of one of Nufarm’s main glyphosate suppliers – Fuhua Group) has aggressively increased his shareholding since November 2015 to 6.2%. Mr Hua has indicated that he has no current intention to seek control of the group, but from a strategic point of view Fuhua Group would have greater control of the crop protection supply chain if Nufarm were to be taken over. Although this is speculation, the argi-chemical industry has recently had a series of mergers and acquisitions making a potential Nufarm takeover a viable possibility. This will largely depend on the actions of Sumitomo and given the synergies between the two companies, we expect Sumitomo to block offers or demand a significant premium. On the other side of the equation, Nufarm has not ruled out future potential acquisitions. Management have stated global regulators may force global competitors to divest assets to prevent industry concentration. Of particular interest is the recent mega Bayer-Monsanto merger which is still in the approval process. If regulatory pressure forces the newly formed company to sell assets, Nufarm may choose to participate and increase market share in Europe and North America where it is exhibiting strong growth. As a result, there is uncertainty surrounding subsequent credit implications if acquisitive activity is undertaken. Click here for the full research report and our security recommendation. Figure 1. Trading Margin History Source: BondAdviser as at 27th of September 2016 Security Summary On the 24th of November 2006, Nufarm Finance (NZ) Limited issued Nufarm Step-Up Securities (NSS) (ASX Code: NFNG) raising $251 million. These securities are perpetual, unsecured, redeemable, exchangeable and subordinated notes. Distributions are discretionary, non-cumulative, fully franked, floating rate and paid of a semi-annual basis. If a distribution is not paid, the issuer is prevented from paying any distributions to ordinary shareholders until a full distribution is paid on a subsequent payment date. The interest margin was set at 1.90% p.a. above the 180-Day BBSW until the 24th of November 2011 (Step-Up Date). On the 22nd of September 2011, the issuer announced that it would not issue a re-marketing process invitation prior to Step-Up date and therefore the margin was increased to 3.90% p.a effective from the Step-Up date. There were no changes to the terms of issue and no further step-up dates scheduled. Nufarm may redeem or exchange NSS on any distribution date subsequent to step-up date. Holders may request redemption if an Acquisition Event occurs which has been recommended by the Nufarm Directors and approved by the Directors for the issue price together with any distribution payment scheduled to be paid.