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

CHICAGO--()--Fitch Ratings has affirmed Bunge Ltd.'s (Bunge) Long-Term Issuer Default Rating (IDR) at 'BBB'. Bunge had approximately $6.9 billion of total debt (granting 50% equity credit for Bunge's convertible preference shares) at the end of June 30, 2016. The Rating Outlook is Stable.

A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

Agribusiness Segment Concentration

Bunge has a leading position in oilseed processing and logistics that supports the approximately $41 billion in consolidated revenues. Bunge has considerable geographical diversification with its global asset footprint covering all major export and import markets although it has substantial exposure to South America including approximately 36% of its total processing capacity. 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 value added 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. This compares to 16% in 2015.

Fitch views Bunge's business risk profile as weaker relative to its peers, Cargill or ADM, due to smaller operational scale and less geographic and commodity diversification. Bunge also has experienced challenges with driving sustained growth in operational earnings as EBITDA has vacillated in the $1.6 billion to $1.8 billion range during the past six years. Fitch expects EBITDA will remain range bound at these levels over the next couple of years. When combined with moderately higher average leverage during the past several years, these factors result in a three notch ratings differential between Bunge and its peers (ADM and Cargill).

Earnings Pressure in South America

In the first half of 2016 (1H'16) Bunge experienced price and margin volatility within the South American agribusiness segment due to negative effects from weather and 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 in Agribusiness declined to $450 million in 1H16 from $494 million in 1H15.

As such, Fitch believes overall operating income could decline up to the mid-single digits in 2016. The view is driven by the current conservativism around the operating environment in the agribusiness segment particularly in South America due to farmers' unwillingness to sell grains creating limited merchandising and crushing opportunities that will likely extend into 2017. Offsets to the challenges in South America include expectations for increasing U.S. and Black Sea grain exports and general improvement in soy and softseed crush margins outside of South America.

The remaining Food & Ingredients, Fertilizer and Sugar & Bioenergy segments are expected in aggregate to contribute approximately $260 million to EBIT in 2016 versus $140 million in 2015. Consequently, Fitch believes that Bunge's EBITDA will remain in the range of $1.7 billion to $1.8 billion in 2016, in line with the average EBITDA over the last four years. The long-term outlook for the agriculture industry remains favorable given higher consumption of protein in developing countries and increasing demand for biofuels. For Bunge to drive EBITDA growth beyond the current $1.8 billion range, the company will need to improve its execution on improving asset returns and may need to consider additional accretive acquisitions.

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 three years, global grain supplies have been replenished from large harvests of key crops, limiting volatility and resulting in lower prices.

RMI Supports Ratings

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 readily marketable inventories (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. Commercial paper, 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 their hedging positions.

Leverage Expected to Moderate

RMI adjusted leverage (Total debt with equity credit less RMI / EBITDA less RMI interest) increased to 2.0x and gross leverage increased to 3.8x for the latest-12-month (LTM) period as of June 30, 2016, from 1.7 x and 2.9x, respectively in 2015. This was primarily driven by working capital usage due to increases with the price and volume of soy related RMI. Bunge reported RMI increased during the first half by approximately $1.4 billion to $5 billion. Fitch expects debt levels to decline in 2016 as RMI levels normalize, partially offset by EBITDA pressure for the remainder of 2016 in the South American operations resulting in RMI adjusted leverage of slightly above 2x. For 2017, Fitch expects RMI leverage should decline to the 1.8x to 1.9x range given a moderate recovery in EBITDA and stable debt levels.

Shareholder Returns Expected to Moderate

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 curtail share repurchase activity during at least the next 12 to 18 months as the company has made a couple of acquisitions including the purchase of the controlling interest in the corn flour producer Grupo Minsa S.A.B. de C.V. Dividends have increased in the low double-digits annually and are expected to rise over the long term, 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 currently manageable given anticipated cash flow generation.

KEY ASSUMPTIONS

Key assumptions within Fitch's rating case in 2016 for Bunge include:

--EBITDA declining by approximately $100 million from 2015 levels to the $1.7 billion range;

--Capital spending to remain below historical levels at approximately $850 million;

--Free cash flow (FCF) turning modestly negative due to increased working capital requirements;

--Modest acquisition activity focused on bolt-on purchases;

--RMI adjusted leverage slightly above 2x and gross debt leverage in the low 3x range.

In 2017, Fitch's assumptions include:

--EBITDA recovering to $1.8 billion;

--Capital spending of approximately $750 million;

--Free cash flow (FCF) turns moderately positive;

--RMI adjusted leverage of approximately 1.8x to 1.9x and gross debt leverage of approximately 3x or less.

Fitch's assumption also includes that commodity prices remain relatively stable over the forecast period.

RATING SENSITIVITIES

Future developments that may individually or collectively, lead to a negative rating action:

--RMI adjusted leverage sustained above 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;

--Gross leverage sustained above 3.5x;

--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;

--Lack of FCF generation lasting over two years.

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.

LIQUIDITY

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 $1.3 billion in the first six months of 2016. Fitch expects FCF remaining modestly negative in 2016 due to working capital requirements and earnings pressure in the agribusiness segment.

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 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. During 2016, Bunge issued EUR600 million and US$700 million of senior notes in the European and U.S public debt markets respectively, which are expected to be used to repay next year's debt maturities along with some financing needs for bolt-on acquisitions.

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'.

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

--Senior unsecured notes at 'BBB'.

The Rating Outlook is Stable.

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 determining the base level of processing RMI required that supports Bunge's processing facilities (approximately $4 billion is considered merchandisable as reported for the second quarter 2016) along with a discretionary 10% of the remaining RMI to determine adjusted RMI available for credit purposes.

Additional information is available on www.fitchratings.com

Applicable Criteria

Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)

https://www.fitchratings.com/site/re/885629

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Bill Densmore
Senior Director
+1-312-368-3125
Fitch Ratings, Inc.
70 W. Madison St.
Chicago, IL 60602
or
Secondary Analyst
Carla Norfleet Taylor, CFA
Senior Director
+1-312-368-3195
or
Committee Chairperson
Monica Aggarwal
Managing Director
+1-212-908-0282
or
Media Relations
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com