Shares in Yara International rebounded 4% on Tuesday as equity analysts gave a guarded welcome to its $4.1m bid for Terra Industries, even as ratings agencies threatened downgrades.

Both Moody's and Standard & Poor's, the ratings agencies, put Yara on watch for possible downgrades to debt ratings, citing the additional loans the Norwegian group will need to help pay for Terra.

"The additional debt burden of the transaction will, in our view, strain Yara's already weakened financial risk profile," Sophia Dedemadis, credit analyst at Standard & Poor's, said.

Yara's planned rights issue of $2.0bn-2.5bn would pay for only half the acquisition, which S&P pegged at $4.7bn including Terra debt, adding that the deal would also increase Yara's exposure to the "volatile" nitrogen fertilizer market.

"We could lower the rating by one notch if Yara were unable to demonstrate a clear path toward restoring its credit metrics and achieving its growth targets in a measured fashion," the agency said.

'Expensive' deal

However, analysts warmed to the deal, helping Yara shares recover some of the 7% lost on Monday after the acquisition was announced.

SEB Enskilda analyst Sjur Malm, while flagging the risk that Yara's cash call would "weigh on the share price until it is finalised", said the Terra deal had a "good strategic rationale".

The sentiment was echoed by Oslo-based Pareto Securities which, although terming Terra's price tag as "steep", said that the combined group would be in a better position play off European against US prices of natural gas, a key raw material for nitrogen groups.

"The acquisition of Terra… gives Yara access to US gas, which looks to be structurally cheaper than EU gas," Pareto said.

Per Haagensen at rival broker Fondsfinans said that Terra Industries presented a "strong strategic fit" for Yara, viewing the price paid as "attractive" compared to that for funding alternative growth schemes.

Yara shares closed up 4.5% at NKr235.80, although not before earlier dipping to NKr221.50, their lowest since November.