CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB' rating to Bunge Limited Finance Corp.'s $500 million senior unsecured notes due November 2020. 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. The Rating Outlook is Stable.
A full list of ratings follows at the end of this release.
KEY RATING DRIVERS
--Bunge's overall earnings are concentrated in the agribusiness segment, which presently contributes around 80% of the company's operating income.
--Bunge targets organic growth in the value-added food and ingredients businesses (edible oils and milling products) along with asset purchases to yield a combined contribution of 35% of overall segment income over time, offsetting reliance on the agribusiness segment.
--Fitch sees gross leverage (total debt to EBITDA) maintained at the low-end of the historical range of 2.5x to 3.5x, supported by the favorable pricing environment and absent more aggressive capital deployment requiring debt funding. Leverage has sequentially decreased over the past few years to a current historical low of 2.6 times (x) under a benign commodity-pricing environment.
--Bunge has extensive sources of liquidity provided by its revolving bank agreements and commercial paper program and positive free cash flow (FCF) since 2013 that has benefited from low commodity pricing and lighter capital spending, a trend that has continued throughout 2015.
--Bunge stepped up share repurchase activity starting in 2014 after taking a hiatus in the prior two years while increasing dividends by double-digits annually, which Fitch feels are manageable under anticipated cash flow generation.
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 represents around 80% of operating income. In an effort to offset earnings concentration, Bunge targets increasing the contribution of the food and ingredients businesses (edible oil and milling products) to 35% of total operating income through a combination of organic growth and asset purchases.
Operating Performance Improvement: Collectively, the agribusiness and food and ingredients segments rebounded in the first nine months of 2015 from weaker-than-expected performance in 2014 with operating profit rising 17.4% to $932 million from $794 million in the same period in 2014. Overall operating income may increase in 2015 supported by the strong start to the year coupled with continued large harvest in key growing regions. Fitch believes that the company may maintain EBITDA in the range of $1.7 billion to $2 billion over the intermediate term. Long-term, the outlook for the agriculture industry is favorable given higher consumption of protein in developing countries and increasing demand for biofuels.
Historically Low Leverage: The steady, low commodity-pricing environment following the pricing spike due to drought conditions in 2012 has limited short-term financing requirements for working capital needs. Peak short-term borrowings dropped more than $400 million during the year to $2.1 billion due to lighter working capital financing, which has benefited gross leverage that has sequentially decreased to the mid-2x range over the past few years (2.6x for the latest 12 months (LTM) as of Sept. 30, 2015). As long as the favorable pricing environment persists, Fitch sees leverage maintained at the low-end of the historical range of 2.5x to 3.5x, absent more aggressive capital deployment requiring debt funding.
Sustained Positive FCF: A key credit concern of commodity processors is access to sufficient liquidity given historically volatile working capital needs. Bunge's extensive external sources of liquidity total over $5 billion and are necessary to offset risk related to fluctuations of internal cash flow generation due to inherent unpredictability of commodity pricing influencing inventory costs. FCF can vacillate from positive to negative from year to year; however, given the steady, low commodity-pricing environment since 2012, coupled with restricted capital spending over the past years; FCF was positive at $316 million in 2014 and $937 million in 2013. While FCF turned slightly negative for the LTM as of Sept. 30, 2015, Fitch sees sustained modest FCF in 2015 considering stable commodity pricing conditions.
Shareholder Returns Increasing: Share repurchases ramped up in 2014 and 2015 with $300 million purchased annually compared to none in 2012 and 2013. Fitch sees repurchases holding at $300 million in 2015 and 2016, absent a leveraging acquisition. In addition, dividends have increased in the double-digits annually, which Fitch believes will continue. Fitch recognizes the risk for an agribusiness company vulnerable to volatile working capital swings directing significantly more cash flow to shareholders but views it is manageable under anticipated cash flow generation. Bunge's commitment to an investment grade credit rating supports Fitch's view that the company will conduct the activities in a disciplined manner.
RMI Supports Ratings: In addition to evaluating traditional leverage metrics, Fitch also considers leverage ratios that exclude debt used to finance readily marketable inventories (RMI). RMI is hedged and very liquid. Including Fitch's discretionary 10% haircut to reported RMI, Bunge's RMI adjusted leverage was 0.4x for the LTM as of Sept. 30, 2015. Since RMI adjusted metrics are generally around 1.0x or below when the company has stress on its operating earnings and cash flow, Fitch places more emphasis on gross leverage.
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 EBITDA compression and/or a stubbornly higher debt load leads to unadjusted leverage exceeding 3.5x or RMI-adjusted leverage rising above 1.0x lasting 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 vicinity of the low 2.0x range, coupled with positive FCF generation sustained for multiple years 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.
Key assumptions within Fitch's rating case for Bunge include:
--EBITDA margins modestly expanding to more than 3% over the next two years in a steady-state low pricing environment;
--Gross debt leverage at the low-end of the 2.5x to 3.5x range including Fitch's expectation for EBITDA improvement;
--Capital spending to remain below historical levels at $900 million annually;
--Positive FCF incorporating a growing dividend and lower-than-historical capital spending;
--Share repurchases in 2015 at the level of the prior year;
--Modest acquisition activity focused on bolt-on purchases.
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)
--Senior unsecured notes 'BBB'.
Additional information is available at 'www.fitchratings.com'.
Date of Relevant Rating Committee: May 22, 2015.
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)