OREANDA-NEWS. S&P Global Ratings said today that it lowered its corporate credit rating on Lansing Trade Group LLC to 'B' from 'B+'. The rating outlook is stable.

At the same time, we lowered our issue-level rating on the company's $175 million unsecured notes to 'B' from 'B+'. The '3' recovery rating is unchanged, indicating our expectation for meaningful recovery (50%-70%; lower half of the range) of principal in the event of a payment default.

"The downgrade reflects our view that Lansing's recent losses reflect a more aggressive risk profile in its trading activities than we had previously factored into our ratings," said S&P Global Ratings' credit analyst Jessica Paige. The company's proprietary trading business experienced significant trading losses due to unanticipated changes in soybeans future prices in the second quarter of this year. No risk management limits were breached when the losses were incurred, and the company halted trading activity once those internal risk limits were reached. However, we believe the risk appetite in this division (which includes a significant amount of equity capital at risk) coupled with the company's earnings exposure to export-related activities that have, on more than one occasion, incurred losses due to unforeseen trade restrictions, reflect a higher degree of risk than we previously assessed. Besides the proprietary trading business, the company's core grain segment continues to experience compressed margins from an oversupplied agricultural commodities global market, which we expect to modestly improve in the second half of 2016. As a result of the poor grain merchandising market conditions, Lansing is unable to benefit from its overall earnings diversity and offset the losses incurred in its proprietary trading and distiller's dried grains with solubles (DDGS) export businesses.

"The stable rating outlook reflects our view that Lansing will maintain modest cash flow ratios, despite our expectation for significant earnings decline in 2016," said Ms. Paige. "We believe the company will maintain debt to EBITDA near 1x and debt to equity between 45%-50%."

We could lower our corporate credit rating on Lansing if the company's adjusted debt balances increase materially during a weaker earnings cycle, resulting in debt to EBITDA approaching 4x or debt to capital of more than 55%. We believe this could occur if EBITDA declines by more than 40%, possibly due to proprietary trading losses and weak container export earnings, and adjusted debt balances increase by more than $100 million.

An upgrade is unlikely over the next year, given our view that the company's core grain merchandising earnings will remain pressured and the company isn't likely to repay debt or increase its equity sufficiently to improve capital adequacy. Still, we could raise the rating if the company improves and maintains EBITDA at more normalized levels without incurring substantial losses in its trading and export businesses or if it sustains its existing cash flow ratios and reduces debt to capital below 45%.