The ratings agency Moody’s said on May 24 it is putting Bayer’s credit rating on review for a possible downgrade, due to the risks of its proposed acquisition of Monsanto. The announcement came hours before the US company rejected its German rival’s initial bid of $122 per share.

Moody’s said it had concerns that paying $62 billion for Monsanto – now possibly more in view of the rejection –would add too much new debt to Bayer’s balance sheet.

While the agency said it believes that the acquisition is “underpinned by a sound strategic rationale reflecting the high complementarity of the two companies' crop science portfolios as well as the robust long-term fundamentals enjoyed by the sector,” it added that it was skeptical of Bayer's intention to finance approximately 25% of the transaction's enterprise value with equity primarily via a rights offering.

This it, said, signals a step change in Bayer's financial policy. Financial leverage of the combined company would increase sharply post-closing, with total debt to EBITDA likely to rise close to 4.5x.

Among other parameters, Moody’s said its review would assess Bayer's capacity to execute in a timely fashion the large acquisition financing, including a sizeable rights issue by comparison to the various equity raising exercises undertaken by European corporates in recent years and also is ability to successfully integrate Monsanto within its existing crop science business and deliver the benefits targeted in its announcement of May 23.

Moody’s currently has Bayer’s senior unsecured notes on an A3 rating. Despite the possible downgrade, the agency said it does not expect the deal to cause Bayer to lose its investment grade status. Last week, Moody called the Bayer bid a “credit negative for Monsanto's Bondholders.”