September 12, 2017 / 11:08 AM / 10 months ago

Fitch Affirms Bunge's IDR at 'BBB'; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, September 12 (Fitch) Fitch Ratings has affirmed Bunge Ltd.'s Long-Term Issuer Default Rating (IDR) at 'BBB'. Bunge had approximately $6.4 billion of total debt (granting 50% equity credit for its convertible preference shares) at the end of June 30, 2017. The Rating Outlook is Stable. A full list of rating actions follows at the end of this release. The rating affirmation considers Bunge's acquisition announcement, the recent EBITDA pressure during the past several quarters with an expected recovery in earnings going forward, and the commitment to deleverage given the expected increase in debt. Bunge will spend $946 million (a 13x multiple before synergies) comprised of EUR297 million and $595 million in cash for a 70% interest in Loders Croklaan, a downstream B2B specialty oils and fats company that is currently part of a Malaysian vertically integrated palm oil producer, IOI Group. The IOI Group will retain limited governance rights under terms of the transaction which includes put and call options. Loders Croklaan has a product portfolio that covers a full range of palm and tropical fats and oils used in several applications including bakery, confectionery and infant formulas. Loders Croklaan has relatively good EBTIDA diversification, split between North America, Asia/ROW and Europe. Bunge will finance the transaction through a three-year $900 million delayed draw term loan credit facility. The transaction is expected to close mid-2018. KEY RATING DRIVERS Loders Good Strategic Fit: Fitch believes the Loders Croklaan transaction represents a good strategic fit for Bunge that improves diversification, consistent with its strategy to build upon its core oilseed value chain and increase the asset portfolio exposure to value-added food and ingredients businesses. Pro forma for the acquisition, value-added businesses will contribute approximately 25% to EBIT compared to 21% during. 2016. Three-year synergies are expected to be approximately $45 million, which Fitch considers as reasonable. Fitch has not assumed any revenue synergies (Bunge estimates $35 million) within its forecast assumptions. With successful synergy realization combined with organic growth in the remainder of its value-added products businesses, Fitch anticipates Bunge's value-added businesses could exceed at least 30% EBIT contribution within the next three years. Agribusiness Segment Concentration: Bunge has a global integrated agribusiness footprint with a leading position in oilseed processing and logistics that supports an average of $1.2 billion in EBIT during the past four years. Bunge has considerable geographical diversification covering all major export and import markets with substantial exposure to South America that represents approximately 36% of its total processing capacity. While the food and ingredients businesses provides some diversification to the business portfolio, Bunge's over-exposure to the agribusiness segment creates more susceptibility to earnings volatility than its peers as experienced in the first half of 2017 (1H17). Bunge has attempted to improve sustainability of longer-term returns and decrease earnings concentration through actively managing its asset portfolio, which is expected to reduce volatility and help address the past earnings stagnation. The company has evolved its agribusiness footprint through more than $1 billion in bolt-on acquisitions within the value-added space during the past 5+ years, entered into joint venture partnerships that improve asset utilization and free up capital, and invested in new facilities to enable organic growth. Earnings Trough in 2017: Bunge's roughly $300 million reduced earnings outlook for 2017 was driven primarily by the Agribusiness segment due to challenging market conditions in South America, despite record crop conditions, and weaker milling performance in Brazil and Mexico. The expected earnings recovery in 2H17 reflects the large amount of grains that are unpriced, since South American farmers will need to commercialize their crops, leading to improved crush and grain origination margins combined with good earnings performance from the soft-seed crush business, improved milling performance in Brazil and Mexico, and realization of cost initiative benefits. A lack of return to more normalized EBIT levels given the recent earnings pressure during the past year and increase in leverage could lead to negative rating actions. One of the key risks to Bunge increasing earnings in 2018 and beyond is a sustained expansion in soy crush margins. High Leverage Expected to Moderate: Readily marketable inventories (RMI) adjusted leverage (total debt with equity credit less RMI / EBITDA less RMI interest) for the LTM ending June 30, 2017 was 2.8x, an increase from 1.7x on Dec. 31, 2016, primarily driven by softer earnings and increased debt due to earlier acquisitions. With the expected earnings recovery in 2H17, Fitch anticipates RMI adjusted leverage of approximately 2x and gross leverage in the mid-3x range. Pro forma for the Loders Croklaan acquisition, RMI adjusted leverage would be in the range of 2.4x to 2.5x. Fitch expects leverage will moderate back to the lower-2x range in 2018 supported by cost savings benefits and further improvement in earnings. Strong Commitment to Rating: Fitch believes Bunge has a strong commitment to maintaining its current rating given the importance of market access and is willing to undertake corrective actions if necessary in the event of material earnings shortfalls or M&A transactions that weaken credit metrics. Bunge has initiated a cost efficiency program with a target of a $250 million run-rate in SG&A savings by the end of 2019 along with capital spending reductions in 2017 ($125 million) and 2018 ($200 million). Cash cost savings to achieve are expected in the range of $200 million to $300 million. Other potential capital allocation adjustments the company could pursue include: a pause on share repurchases, which the company has already demonstrated in the past following acquisitions, slowdown in additional bolt-on acquisitions, and the issuance of additional equity in hybrid or common form at a minimum to protect investment-grade ratings. Dividends, which have increased annually in the low double-digits the past four years, are expected to rise over the long term. Exposure to Commodity Volatility: Bunge, along with other agricultural processors, are subject to variations with commodity pricing that can be affected by a range of unpredictable macro-environmental conditions that include weather, crop disease outbreaks, and government agricultural policy changes. Thus, Bunge can be exposed to periods of volatile agricultural commodity pricing swings stemming from periodic supply/demand imbalances, timing of cash payments or foreign exchange movements that can negatively affect U.S exports. Consequently, operating earnings can be pressured and/or debt can increase, which can quickly increase leverage. During the past several years, global grain supplies have been replenished from large harvests of key crops, limiting volatility and generally resulting in lower prices. However, the low interest-rate environment has enabled speculative investment inflows into commodity markets that have resulted in commodity prices slightly higher than expected when considering the large global commodity surpluses. DERIVATION SUMMARY Fitch views Bunge's business risk profile as weaker relative to its peers, Cargill (A/Stable) or ADM (A/Stable), due to its smaller operational scale, less commodity diversification, and substantial concentration to its agribusiness segment with oilseed origination and processing. Bunge has also experienced challenges in driving sustained growth in operational earnings as EBITDA has remained in the $1.6 billion to $1.8 billion range during the past six years, with expected earnings at a trough in 2017 below $1.6 billion due to challenging conditions in South America. When combined with moderately higher average leverage, these factors result in a three-notch ratings differential between Bunge and its peers (ADM and Cargill). Bunge has moderately increased its diversification into Food and Ingredients during the past several years largely through M&A. However, Ingredion's (BBB/Stable) ingredient business has more scale and greater stability with higher profitability than Bunge's Food and Ingredients operations. Ingredion's segments are more narrowly focused as a global producer of corn-refined, agriculturally based products and ingredients, as well as starches focused on the food, beverage, animal nutrition, paper & corrugating and brewing market segments. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: In 2017, Fitch's assumptions include: --EBITDA declining to around $1.5 billion; --Capital spending of $725 million; --FCF modestly negative; --No share repurchases; --RMI adjusted leverage of 2x and gross debt leverage of 3.6x excluding the Loders Croklaan acquisition; --Pro forma for the Loders Croklaan acquisition, RMI adjusted leverage is in the 2.4x-2.5x. range. In 2018-2019, Fitch assumptions include: --EBIT recovery in Bunge core operations of approximately $100 million in 2018 resulting in EBITDA of approximately $1.8 billion supported by recent bolt-on M&A, and $1.9 billion in 2019; --Capital spending in the upper $600 million to low $700 million range; --FCF modestly positive; --Minimum level of cash of roughly $350 million; --RMI adjusted leverage reduces to 2.1x in 2018, 1.9x in 2019; --Fitch believes Bunge would revisit share repurchases once financial profile improves and leverage returns to more normalized levels. Fitch's assumption also includes that commodity prices remain relatively stable over the forecast period with a recovery in Latin America as economic conditions improve. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action Given the inherent earnings volatility within the business, the significant periodic supply/demand imbalances and where Bunge is expected to manage its capital structure, Fitch views a positive rating action as unlikely over the intermediate term. Future developments that could, individually or collectively, lead to a positive rating action include: --Materially improved diversification and profitability of the corporate portfolio with increased contribution from the value-added food and ingredients businesses such that Bunge can achieve EBITDA growth over a multiyear period and exhibit more stability over the commodity pricing cycle; --A commitment to operate RMI adjusted leverage consistently below 1.5x coupled with improved consistency with FCF generation. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action --RMI adjusted leverage sustained above the 2x range driven by EBITDA compression and/or a meaningfully higher debt levels most likely from changing macro-environmental conditions or increase in working capital; --A material increase in leverage from a significant debt-financed acquisition, with lack of meaningful deleverage that returns RMI adjusted leverage to below 2x 24-months post transaction; --Change in financial policy; --Gross leverage (debt to EBITDA) sustained above 3.5x; --Lack of FCF generation lasting over two years. LIQUIDITY Internal Liquidity: Bunge's internal sources of liquidity include $575 million of cash and cash equivalents, $290 million of marketable securities, and short-term investments as of June 30, 2017. FCF can fluctuate from positive to negative from year to year due to numerous factors. For 2017, Fitch expects FCF will be modestly negative. Bunge has no material maturities until 2019. Abundant External Liquidity Sources: 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 billion in capacity under its revolving bank agreements and commercial paper (CP) program, of which $4.1 billion was available at the end of June 30, 2017. 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 31, 2017, there was $495 million of borrowings outstanding. In addition, Bunge's operating companies had $1.3 billion in outstanding short-term borrowings from local bank lines of credit to support working capital requirements. Bank Commitments: The bank commitments at Bunge Limited Finance Corp. (BLFC) are made up of unsecured bilateral three-year agreements of $200 million maturing in June 2019 and $500 million maturing September 2019 with $300 million of borrowings outstanding, a $865 million five-year CoBank revolving credit agreement maturing that was recently extended five years to 2023 with $118 million of borrowings 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 RCF established by Bunge Finance Europe B.V. (BFE) with $477 million of 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 CP program that had no borrowings outstanding. AR Securitization: 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 de-recognized on the balance sheet) were $672 million and $628 million as of June 30, 2017 and Dec. 31, 2016, respectively. Ratings Reflect RMI Adjustments: Agricultural commodity trading and processing companies maintain substantial grain and oilseed inventories that are hedged and could readily be converted into cash to enhance their liquidity and reduce debt. This high level of liquid RMI, when combined with cash and short-term marketable securities, provides substantial financial flexibility during periods of earnings volatility associated with agricultural cycles, partially mitigating financial risk. CP, accounts receivable securitizations and bank credit facilities are generally used to finance seasonal working capital needs, primarily related to RMI. For credit purposes, Fitch calculates RMI adjusted leverage by first subtracting the minimum or base level inventory required to operate a downstream processing facility. This inventory is not generally readily available for liquidation purposes with a going-concern entity. An additional 10% discount is taken for the remaining merchandisable inventory (reported RMI less minimum base processing inventory) to account for potential basis risk loss on hedging positions. FULL LIST OF RATING ACTIONS Fitch affirms the ratings of Bunge and its subsidiaries as follows: Bunge Limited --Long-Term IDR at 'BBB'; --Preference shares at 'BB+'. Bunge Limited Finance Corp. (BLFC) --Long-Term IDR at 'BBB'; --Senior unsecured bank facility at 'BBB'; --Senior unsecured notes at 'BBB'. Bunge Finance Europe B.V. (BFE) --Long-Term IDR at 'BBB'; --Senior unsecured bank facility at 'BBB'; --Senior unsecured notes at 'BBB'. Fitch has also assigned the following rating: BLFC --3-year $900 million delayed-draw term loan credit facility 'BBB'. The Rating Outlook is Stable. Contact: Primary Analyst Bill Densmore Senior Director +1-312-368-3125 Fitch Ratings, Inc. 70 W. Madison St. Chicago, IL 60602 Secondary Analyst Carla Norfleet Taylor, CFA Senior Director +1-312-368-3195 Committee Chairperson Stephen Brown Senior Director +1-312-368-3139 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 (i.e. non-redeemable by the company), the option to defer the dividend and cumulative coupon deferral. --Reported RMI is reduced by determining the base level of processing RMI required that supports Bunge's processing facilities (approximately $3.1 billion is considered merchandisable as reported for the second quarter 2017) along with a discretionary 10% of the remaining RMI to determine adjusted RMI available for credit purposes. Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: Additional information is available on For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here Non-Financial Corporates Hybrids Treatment and Notching Criteria (pub. 27 Apr 2017) here Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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