Fitch Affirms Bunge's IDRs at 'BBB' on Moema Acquisition; Outlook Stable

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the following ratings for Bunge Limited (Bunge) and its financing subsidiaries upon the announcement that Bunge has entered into an agreement to become the 100% owner of Usina Moema Participacoes S.A. (Moema Par):

Bunge Limited

--Issuer Default Rating (IDR) at 'BBB';

--Preference shares at 'BBB-'.

Bunge Limited Finance Corp. (BLFC)

--IDR at 'BBB';

--Senior unsecured notes at 'BBB';

--Senior unsecured term loans at 'BBB';

--Senior Unsecured Credit Facilities at 'BBB'.

Bunge Finance Europe B.V. (BFE)

--IDR at 'BBB';

--Senior Unsecured Credit Facilities at 'BBB'.

Bunge N.A. Finance L.P. (BNAF)

--IDR at 'BBB';

--Senior unsecured notes at 'BBB'.

The Rating Outlook is Stable.

Moema Par is a holding company that owns 100% of one sugarcane mill in Brazil and has varying ownership interests in an additional five mills in Brazil. The cluster of six sugarcane mills has total crushing capacity of 15.4 million metric tons. Bunge will have a 60% effective ownership of the group of mills, or 9.3 million metric tons of capacity, comprised of Moema Par 100% owned mill and its interests in four of the five other mills. The enterprise value of the Moema Par transaction is approximately $896 million, including approximately $480 million of net debt and excluding $36 million of working capital. Moema Par's shareholders will receive approximately 7.3 million of Bunge common shares. This transaction is expected to close within 45 days.

Bunge may also enter into agreements to acquire the remaining outstanding interests in any or all of the remaining five mills on similar economic terms to the Moema Par transaction. If Bunge also acquires the remaining interests not wholly owned by Moema Par, the total enterprise value, including the Moema Par transaction, would be approximately $1.48 billion. The $1.48 billion enterprise value includes the assumption of approximately $710 million of net debt. The Moema Par shareholders plus additional shareholders would receive approximately 13.4 million shares of common stock of Bunge, subject to adjustments. The deal structure has sufficient equity to have a neutral to positive ratings impact. This acquisition greatly expands Bunge's current position in Brazilian sugar and ethanol processing with its three current mills which are ramping up capacity. It will position Bunge as a top tier player in Brazilian sugar and ethanol. The sugar, ethanol and co-generation earnings streams are expected to provide further diversification to Bunge's existing earnings streams. The mills are well positioned for cost savings with their close cluster configuration and access to transportation.

Bunge's ratings are supported by the company's position as the world's leading oilseed processor and the leading producer and supplier of fertilizer to farmers in Brazil. The ratings incorporate periodic operating earnings and cash flow volatility associated with the agricultural sector. While the company's recent weak operating performance is more severe than is typically factored in for the sector, this period is expected to be short-lived. Bunge's maintenance of ample liquidity is crucial to support its ratings during periods of weak earnings. A long-term favorable agribusiness outlook is also factored into the ratings.

In contrast to Bunge's record high earnings and cash flow generation for the full year 2008, the company incurred net losses in the fourth quarter of 2008 and the first quarter of 2009. For the nine months ended Sept. 30, 2009, net sales fell 24% to $31.5 billion and segment EBIT dropped 76% to $425 million. Nine months fertilizer segment EBIT was negative $442 million due to continued high inventory costs coupled with weak market prices, reducing margins. Reduced planting of fertilizer-intensive corn and cotton in Brazil, as well as farmers' cautious approach to input purchases, exacerbated the low pricing environment. These conditions will continue in the fourth quarter of 2009; however, Bunge's margin structure should reset to more normal levels in 2010 as new inventories are purchased at market cost. Agribusiness EBIT decreased 27% to $760 million, versus record high results during the previous year period. U.S. and Brazilian grain origination businesses benefited from tight soybean supplies in Argentina due the drought-reduced crop earlier in the year and strong demand from China. Higher soybean processing results in the U.S. and South America were partially offset by lower results in Europe and Canada.

Operating activities used cash of $547 million during the nine months, versus $1.7 billion cash provided the prior-year end period, due to lower net income and fertilizer accounts payable. Free cash flow (after capital expenditures and dividends) was negative $1.3 billion. FCF for the full year 2009 is likely to be slightly worse, due to continued high capital expenditures, estimated at approximately $1 billion for the year. Fitch anticipates a return to more normal earnings in 2010 should lead to significant improvement in FCF for the year.

Bunge's credit metrics weakened severely on an LTM basis over the past two quarters as stronger earnings rolled off and recent net losses were included. Total debt with equity credit/operating EBITDA increased from 2.6 times (x) for the LTM period ending March 31, 2009 to 9.6x for the LTM ended Sept. 30, 2009. For the full year 2009, Fitch expects total debt with equity credit/operating EBITDA to improve to approximately 4x, from its peak leverage at Sept. 30, 2009, since the weakest period (fourth quarter of 2008) will no longer be included. While Fitch had expected metrics to weaken, peak leverage was higher than Fitch had anticipated due to a lack of expected recovery in fertilizer in the second half of 2009. Leverage should continue to improve as earnings become more normalized in 2010. As Bunge works through its high cost fertilizer inventory, its margins are expected to increase. Also, soybean crush margins have benefited due to tight global supplies exacerbated by Argentina's soybean crop shortfall. However, if Bunge's operating results over the next several quarters fall materially short of current expectations, there will be downward pressure on the ratings.

In addition to evaluating traditional credit measures, Fitch's analysis of agricultural companies takes into consideration leverage ratios that exclude debt used to finance readily marketable inventories (RMI). Interest expense on debt used to finance RMI is reclassified as cost of goods sold and thus is excluded from interest expense. Fitch utilizes significant discretion in this calculation. With the adjustments described above, Bunge's total debt/EBITDA was 5.4x for the LTM ended Sept. 30, 2009, materially worse than 1.1x for the LTM ended March 31, 2009 and EBITDA/interest expense was 1.7x, down from 5.4x for the March 31, 2009 period.

Bunge had $980 million cash on Sept. 30, 2009, excluding $121 million cash at Fertilizantes Fosfatados S.A.-FOSFERTIL (Fosfertil), a non-wholly owned publicly traded phosphate and nitrogen producer in Brazil. Cash at Fosfertil is generally not available to Bunge unless a cash distribution is made. In August 2009 Bunge had supplemented its liquidity with approximately $760 million proceeds from a follow-on offering of common shares, which was partially used to pay down debt. Bunge had $4.3 billion of total debt with equity credit and $3.5 billion of committed borrowing capacity, with $35 million of commercial paper (CP), outstanding at Sept. 30, 2009. The remainder of the facilities was unused and available. Despite Bunge's steep earnings decline, its liquidity is sufficient. Borrowings by Bunge's subsidiaries carry full, unconditional guarantees by Bunge Limited. During November 2009, Bunge's subsidiary, Bunge Finance Europe, entered into a $600 million credit facility due April 2011. In conjunction with the new facility, the previous $600 million facility expiring January 2010 was terminated. Bunge's committed credit facilities are subject to financial covenants, including minimum net worth, maximum debt to capitalization and a minimum current ratio. Bunge had approximately $480 million of borrowing capacity available under its $660 million accounts receivable securitization facilities at Sept. 30, 2009. Bunge's liquidity also includes its RMI, which was $2.3 billion on Sept. 30, 2009, factoring Fitch's 10% discretionary haircut to Bunge's reported RMI. This commodity inventory is very liquid due to widely available markets and international pricing mechanisms. RMI is substantially hedged against price risk.

Bunge has two securities that are evaluated under Fitch's hybrid rating criteria. Bunge's $863 million 5.125% mandatory convertible preference shares are assigned 100% equity credit due to their junior ranking, mandatory conversion to common shares on Dec. 1, 2010, the dividend deferral option combined with the ability to pay in common shares, and the lack of covenants. The ratings for Bunge's $690 million 4.875% convertible perpetual preference shares are assigned 75% equity credit due to the junior ranking of these shares, the dividend deferral option and the non-redeemable feature of these securities.

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