Press Release: Fitch Rates Bunge’s $700MM Sr. Unsecured Notes ‘BBB’
The following is a press release from Fitch Ratings: Stock Market Quotes, Business News, Financial News from http://commodity-market-news.com
Fitch Ratings-Chicago-10 August 2016: Fitch Ratings has assigned a ‘BBB’ rating to Bunge Limited Finance Corp. $700 million senior unsecured notes due 2026. The new notes are fully and unconditionally guaranteed by Bunge Ltd. (Bunge). Bunge intends to use net proceeds from the issuance for general corporate purposes, including repayment of outstanding indebtedness such as borrowings under Bunge’s revolving credit facilities. The Rating Outlook is Stable.
A full list of ratings follows at the end of this release.
KEY RATING DRIVERS
Agribusiness Segment Concentration
Bunge has a leading position in oilseed processing and logistics, and accordingly the agribusiness segment contributes the vast majority of overall operating income. While there is some diversification of the business portfolio provided by the food and ingredients businesses, the agribusiness segment currently represents more than 80% of operating income. In an effort to offset earnings concentration and help reduce volatility, over the longer term, Bunge targets increasing the contribution of the food and ingredients businesses (edible oil and milling products) to approximately 35% of total operating income through a combination of organic growth and asset purchases.
Despite First Half Volatility, Earnings Expected to Remain Stable
Bunge’s first half of 2016 experienced price and margin volatility within the South American agribusiness segment due to the negative effects from weather and the weakening of the U.S. dollar against key grain growing region currencies. Near-term margins have also been pressured in South America due to higher than anticipated farmer retention of soybeans. Consequently, EBIT results for the first six months in Agribusiness were down from 2015 at $450 million compared to $494 million.
Fitch expects overall operating income growth for 2016 to be flat to slightly positive in 2016 as dislocation opportunities present themselves in the back half of 2016 and into 2017 related to expected South American crop reductions that should benefit U.S. and Black Sea exports and North American crush margins that have been weak. The Softseed crushing environment is also expected to improve from lower 2015 levels reflecting the expected large harvests. The remaining Food & Ingredients, Fertilizer and Sugar & Bioenergy segments are all expected to demonstrate modest to moderate earnings growth from 2015 levels. Consequently, Fitch believes that the company will maintain EBITDA in the range of $1.8 billion over the intermediate term. The long-term outlook for the agriculture industry is favorable given higher consumption of protein in developing countries and increasing demand for biofuels.
Elevated Leverage Driven by Increased RMI
Gross leverage (which adds debt related to receivables securitization) increased to 3.8x as of June 30, 2016 compared to 2.8x in 2015. The rise in leverage was driven by working capital usage due primarily to increases with the price and volume of soy related readily marketable inventories (RMI). RMI increased during the second quarter by $1.1 billion. For the second half of 2016, Fitch expects operating earnings will be relatively stable with a moderation in debt levels resulting in leverage in the mid 3x range for 2016.
RMI Supports Ratings
In addition to evaluating traditional leverage metrics, Fitch also considers leverage ratios that exclude debt used to finance RMI. RMI, which is hedged and very liquid, could be converted to cash if needed. This high level of liquid inventories, coupled with cash, provides substantial financial flexibility during periods of earnings volatility associated with agricultural cycles, partially mitigating financial risk. Bunge’s RMI adjusted leverage — which Fitch calculates by subtracting 90% of RMI (after applying a 10% haircut) from total debt of $6.9 billion — was 1.5x for the latest 12 months (LTM) period ending June 30, 2016.
Shareholder Returns Increasing
Share repurchases have ramped up the past two years to $300 million annually compared to none in 2012 and 2013. Bunge repurchased $200 million in shares during the first half of 2016. With the increase in leverage, Fitch expects Bunge will moderate share repurchase activity going forward. In addition, dividends that have increased in the low double-digits annually, are expected to rise, tracking expected growth in earnings. Fitch recognizes the risk for an agribusiness company vulnerable to volatile working capital swings directing significantly more cash flow to shareholders but views it as manageable given anticipated cash flow generation.
Key assumptions within Fitch’s rating case in 2016 for Bunge include:
–EBITDA margins modestly expanding from 2015 level of 4.3%;
–Capital spending to remain below historical levels at approximately $850 million;
–Free cash flow (FCF) turning moderately negative in 2016 due to increased working capital requirements;
–Modest acquisition activity focused on bolt-on purchases;
–Gross debt leverage in the mid 3x range and RMI adjusted leverage in the mid 1x range.
Future developments that may individually or collectively, lead to a negative rating action:
–Fitch sees Bunge generally operating with gross debt leverage in the range of 2.5x to 3.5x. However, rating pressure will arise if persistent EBITDA margin compression and/or a meaningfully higher debt leads to unadjusted leverage exceeding 3.5x over two crop cycles;
–Lack of funds from operations (FFO) coverage of capital spending and dividends, such that meaningful incremental debt funding becomes necessary;
–A material and sustained increase in leverage from a significant debt financed transaction, most likely a large acquisition.
Future developments that may individually or collectively, lead to a positive rating action:
–Fitch does not see positive rating action over the intermediate term given vulnerability of the credit profile to significant periodic commodity supply/demand imbalances;
–However, a commitment to operate with total debt leverage in the low 2.0x range, coupled with positive FCF generation could support an upgrade of the ratings.
–In addition, diversification of the corporate portfolio with increased contribution from the value-added food and ingredients businesses such that EBITDA margins increase to the mid-single digits and exhibit more stability over the commodity pricing cycle could support an upgrade.
Abundant Sources of External Liquidity Supports Operations
Bunge’s internal sources of liquidity include $548 million of cash and cash equivalents, $215 million of marketable securities and short-term investments and FCF that can fluctuate from positive to negative from year to year. Bunge generated a deficit of $722 million during the LTM period due primarily to the working capital increase in RMI attributable to merchandising activities that increased by $1.4 billion in the first six months of 2016. Fitch expects FCF turning moderately negative in 2016 due to increased working capital requirements.
A key credit concern of commodity processors is access to sufficient liquidity given historically volatile working capital needs. Bunge has abundant sources of external liquidity provided by various credit facilities available to fund its operations globally, with approximately $5.0 billion in capacity under its revolving bank agreements and commercial paper program, of which $3.4 billion was available at the end of the second quarter of 2016. In addition to the committed credit facilities, Bunge through its financing subsidiaries will from time-to-time enter into bilateral short-term credit lines as necessary. As of June 30, 2016, there was $300 million outstanding.
The bank commitments at Bunge Limited Finance Corp. (BLFC) are comprised of unsecured bilateral three-year agreements of $200 million maturing in June 2019 and $500 million maturing November 2016 with $100 million of borrowings outstanding, a $865 million five-year CoBank revolving credit agreement maturing May 30, 2018 with $290 million outstanding, and a five-year syndicated unsecured revolver totalling $1.1 billion maturing in November 2019 with no borrowings outstanding. In addition, Bunge has a three-year $1.75 billion revolving credit facility established by Bunge Finance Europe B.V. (BFE) with $752 million in borrowings outstanding. The revolver, which can be expanded by $250 million, matures in August 2018 and can be extended by two one-year periods. A $600 million liquidity facility at Bunge Asset Funding Corp. (BAFC) backstops a $600 million commercial paper program that had $450 million outstanding.
Bunge also participates in a receivables securitization program that provides funding up to $700 million. Bunge subsidiaries sell receivables to a bankruptcy remote entity (Bunge Securitization B.V.) that subsequently sells the receivables. Receivables sold under the program (and derecognized on the balance sheet) were $568 million and $524 million as of June 30, 2016 and Dec. 31, 2015, respectively.
Bunge has material maturities in the next 12 months including $250 million of unsecured notes due in April 2017 and $600 million of unsecured notes due in June 2017. Fitch expects Bunge to manage the maturing notes through either long-term debt issuances or with bank borrowings as the company did for the $500 million of unsecured notes due in March 2016 given the company’s current sources of liquidity and access to the capital markets.
Fitch currently rates Bunge and its subsidiaries as follows:
–Long-Term IDR ‘BBB’;
–Preference shares ‘BB+’.
Bunge Limited Finance Corp. (BLFC)
–Long-Term IDR ‘BBB’;
–Senior unsecured bank facility ‘BBB’;
–Senior unsecured notes ‘BBB’.
Bunge Finance Europe B.V. (BFE)
–Long-Term IDR ‘BBB’;
–Senior unsecured bank facility ‘BBB’.
Bunge N.A. Finance L.P. (BNAF)
Press Release: Fitch Rates Bunge’s $700MM Sr. -2-
–Senior unsecured notes ‘BBB’.
Fitch Ratings, Inc.
70 W. Madison St.
Chicago, IL 60602
Carla Norfleet Taylor, CFA
Megan Neuburger, CFA
Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli[a]fitchratings.com.
Summary of Financial Statement Adjustments – Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below:
–Financial statement adjustments for adding back off-balance sheet receivables securitization.
–Fitch grants 50% equity credit to Bunge’s 4.875% cumulative convertible preferred shares after considering the junior ranking, the permanence (non-redeemable by the company), the option to defer the dividend and cumulative coupon deferral.
–Reported RMI is reduced by a discretionary 10% in Fitch’s adjusted RMI leverage metrics.
Date of Relevant Rating Committee: May 20, 2015.
Additional information is available on www.fitchratings.com
Corporate Rating Methodology – Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)