May 22, 2014 / 8:01 PM / 3 years ago

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

(The following statement was released by the rating agency) CHICAGO, May 22 (Fitch) Fitch Ratings has affirmed Bunge Ltd.'s (Bunge) 'BBB' long-term IDR. The ratings apply to approximately $5.9 billion of total outstanding debt (granting 50% equity credit for Bunge's convertible preference shares). The Rating Outlook is Stable. See a full list of ratings at the end of this release. KEY RATING DRIVERS Bunge's overall earnings are concentrated in the agribusiness segment that presently contributes around three-quarters of overall revenues and operating income. The agribusiness industry has favorable long-term demand prospects from increased protein consumption in developing nations as well as higher use of biofuels across the globe. Unadjusted debt leverage fluctuates in conjunction with commodity prices, tending to increase when pricing rises as incremental debt is needed to finance working capital demand. Fitch sees Bunge's unadjusted leverage generally falling in the range of 2.5x to 3.5x, and leverage adjusted for readily marketable inventories (RMI) staying below 1.0x. Bunge placed its sugar and bioenergy businesses under strategic review, specifically related to the poor performance of the industrial operations since the company meaningfully expanded the business in February 2010. Since that time, the sugar and bioenergy segment has significantly underperformed leading to pressure on Bunge's overall margin. Timing of the action as well as amount and use of proceeds are uncertain. Bunge has extensive external sources of liquidity that acts as strength while internal cash flow generation vacillates due to inherent unpredictability of commodity pricing dramatically affecting working capital needs. Bunge had $3.55 billion in capacity available under its revolving bank agreements and commercial paper program. Bunge also had approximately $4.56 billion in readily marketable inventories of agricultural commodities (including Fitch's 10% discretionary haircut) as of March 31, 2014. Leading global position in oilseed processing Bunge's ratings reflect the company's strong presence in oilseed processing, and some diversification across its business portfolio. Following the divestiture of the retail fertilizer business and a possible sale of the sugar businesses as a result of the strategic review currently underway, Bunge is more reliant on earnings and cash flow generated from the agribusiness segment, which currently represents around three-quarters of revenues and operating income. Relatively steady EBIT of the operating segment over the past years at approximately $1 billion annually offset losses from the sugar and bioenergy division. Despite a rough start to the year, earnings support through the year will stem from greater commercialization of Brazilian and Argentinian harvests as well as potentially larger U.S. crops. Excessive supply of soybeans in China may continue to pressure margins over the near-term. Fitch also anticipates that overall earnings growth will be supported by increased contributions from food and ingredients coupled with decreasing losses from the sugar segment. Fitch feels that Bunge can maintain overall EBITDA in the range of $1.7 billion to $2 billion in most years underpinned by a minimum of $1 billion of annual operating income derived from the agribusiness segment. Long-term, the outlook for the agriculture industry is favorable given higher consumption of protein in developing countries and increasing demand for biofuels. Commodity price variations impact working capital Bunge along with other agricultural processors are subject to commodity pricing volatility arising from a number of uncertainties including weather conditions, animal disease outbreaks, and government agricultural policy changes. Higher priced inventories drive increased leverage and pressure cash flows, and vice versa when prices decline. As such, free cash flow (FCF, operating cash flow less dividends and capital spending) jumps from positive to negative virtually every year. FCF was negative $1.7 billion, $937 million and negative $173 million for 2012, 2013, and the LTM ending March 31, 2014, respectively. A price spike from drought conditions in the U.S. negatively affected cash flow and working capital levels in 2012, while more stable pricing resulting from abundant harvests has helped to steady cash flows hence. Cash flows this year will benefit from capital preservation efforts, especially in the sugar business that will ease overall spending to around $900 million. Fitch sees the possibility of consecutive years of positive FCF in 2014, albeit modest. Extensive external liquidity backstops internal cash flow volatility Bunge's extensive external sources of liquidity act as a strength while internal cash flow generation fluctuates due to the inherent instability of commodity pricing. Bunge had $4.8 billion in committed liquidity capacity under its revolving bank agreements and commercial paper program at the end of the first quarter, of which $3.55 billion was available. Bunge Finance Europe B.V. recently executed a new three-year $1.75 billion revolving credit facility maturing in March 2017, replacing a prior $1.75 billion credit facility. Bunge can extend the new facility by two one-year periods and expand capacity by $250 million, subject to mutual agreement with the lenders. Fitch recognizes additional support to Bunge's already strong liquidity provided by RMI of agricultural commodities including soybeans and sugar that totaled $4.56 billion on March 31, 2014. RMI is highly liquid given widely available markets and international pricing mechanisms. In addition, Bunge also participates in a $700 million receivables securitization program and has $632 million in balance sheet cash and cash equivalents. Short-term debt stressing leverage Incremental debt utilized to finance working capital demands places stress on leverage; however, Fitch sees gross leverage (total debt to EBITDA) generally staying in the range of 2.5 times (x) to 3.5x. Fitch recognizes Bunge's commitment to an investment grade credit rating via sustained balance sheet strength and financial discipline. Total debt leverage rose to 3.5x for the LTM ending March 31, 2014 from 2.5x at the end of 2013 due to a higher level of short term borrowings to fund inventories of soybeans as South America commercializes its harvest. Higher earnings weighted to the second half of the year coupled with a reduced debt load should yield gross leverage at the lower half of the historical range, in Fitch's estimation. Bunge's coming long-term debt maturities are manageable given the company will see $382 million in 5.1% unsecured notes maturing in July 2015. Fitch also considers RMI in the evaluation of credit measures utilizing a 10% discretionary reduction to Bunge's reported RMI. In the RMI-adjusted debt leverage calculation, Fitch excludes incremental debt utilized to fund the RMI and reduces EBITDA by the amount of interest on the debt used to finance RMI (i.e RMI interest is reclassified to costs of goods sold). Similarly, interest expense on debt used to finance RMI is excluded from EBITDA and interest expense in the calculation of EBITDA-to-interest coverage ratios. Using the adjustments, RMI-adjusted debt leverage was 0.8x and 0.4x, and RMI-adjusted interest coverage was 4.8x and 6.2x for the LTM ending March 31, 2014 and full year 2013, respectively. RATING SENSITIVITIES Future developments that may individually or collectively, lead to a negative rating action: --Fitch is comfortable with Bunge operating with gross debt leverage in the range of 2.5x to 3.5x. However, rating pressure will arise if EBITDA compression and/or a higher debt load leads to sustained unadjusted leverage exceeding 3.5x or RMI-adjusted leverage rising above 1.0x; --A consistent lack of FFO coverage of capital spending and dividends, such that meaningful incremental debt funding becomes necessary; -- A material increase in leverage from a significant debt financed transaction, most likely a large acquisition. Fitch sees a positive rating action as unlikely over the intermediate term. However, Fitch will favorably view a commitment to operate with total debt leverage in the vicinity of the low 2.0x range, coupled with material FCF generation for multiple years. Fitch affirms Bunge's rating with a Stable Outlook 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'. Bunge N.A. Finance L.P. (BNAF): --Long-term IDR at 'BBB'; --Senior unsecured notes at 'BBB'. Contact: Primary Analyst Michael Zbinovec Senior Director +1-312-368-3164 Fitch Ratings, Inc., 70 W. Madison Street, Chicago, IL 60602 Secondary Analyst Judi Rossetti, CFA, CPA Senior Director 7+1-312-368-2077 Committee Chairperson Wesley E. Moultrie II, CPA Managing Director +1-312-368-3186 Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: Additional information is available at ''. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (Aug. 5, 2013). Applicable Criteria and Related Research: Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage here Additional Disclosure Solicitation Status 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 WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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