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Rating Action:

Moody's downgrades Barry Callebaut's ratings to Ba1; stable outlook

Global Credit Research - 08 May 2013

London, 08 May 2013 -- Moody's Investors Service has today downgraded the long-term issuer rating of Barry Callebaut AG (Barry Callebaut) to Ba1 from Baa3. At the same time, Moody's has converted the rating into a corporate family rating (CFR) and probability of default rating (PDR), in line with the rating agency's practice for issuers that have migrated into speculative grade. Concurrently, Moody's has downgraded to Ba1, with a loss given default (LGD) assessment of LGD4, from Baa3 the ratings of the combined EUR600 million of senior unsecured notes issued by Barry Callebaut's fully owned and guaranteed subsidiary Barry Callebaut Services NV. The outlook assigned to the ratings is stable.

This action follows Barry Callebaut's announcement that it has entered into a definitive agreement to acquire the Cocoa Ingredients Division of Petra Foods Ltd. (Petra) for a total consideration of $950 million (approximately CHF882/EUR720 million) on a cash/debt-free basis. Petra shareholders approved the transaction on 30th April. To finance the transaction Barry Callebaut is seeking to raise a combination of $600 million of bond debt and $300 million of common equity in advance of closing. Albeit the acquisition financing is backstopped by a bridge loan from banks. The company will also utilise $50 million of existing local debt. The transaction remains subject to approval by regulatory authorities and closing is expected in summer 2013.

RATINGS RATIONALE

"The downgrade largely reflects the negative impact of the Petra transaction on Barry Callebaut's key credit metrics and financial flexibility, given the acquisition is financed predominantly with debt," says Andreas Rands, a Moody's Vice President - Senior Analyst and lead analyst for Barry Callebaut. "The downgrade also reflects our expectation that, going forward, Barry Callebaut's financial profile will be less conservative than it has been historically," explains Mr. Rands. "This view is based on Barry Callebaut's recent heightened level of acquisition and investment activity, which indicates that, going forward, the company will be more willing to increase its financial leverage and be financially aggressive than was incorporated in the previous ratings."

Whilst the acquisition will not close until summer 2013, Moody's expects it to result in Barry Callebaut's financial leverage (debt/EBITDA, as adjusted by Moody's) remaining above 3.5x by financial year (FY) 2014 (ended 31 August), up from 2.9x in FY2012. In addition, Moody's expects the company's retained cash flow (RCF)/net debt to weaken in to the mid-to-high teens in percentage terms and not return to the low 20s until FY2016/17. The increase in leverage is a result of the $600 million (approximately CHF558/EUR455 million) of new debt to refinance the Petra transaction, with the balance to be funded with $300 million of common equity and $50 million of existing local debt. Although Barry Callebaut intends to improve its financial leverage over the next few years to be consistent with investment-grade levels, Moody's considers this a challenging task. Moody's expects the company's financial leverage to exceed 3.0x until FY2016/17, assuming Petra is successfully integrated as planned. The rating agency notes the additional integration risk associated with the transaction given that Petra is currently underperforming and significantly loss-making at the net profit level in FY2012 ($28.6 million loss relative to $21.2 million profit in FY2011). Moody's also notes comments by Petra in their Annual Report 2012 that significant investment in the Cocoa Ingredients Division is required to support future organic growth. They also expect the division to remain loss-making in FY2013.

Moody's further notes that the deleveraging task facing Barry Callebaut comes on top of more than CHF105 million (EUR85 million) of investments by the company since H2 FY2012, including (1) the CHF33 million (EUR27 million) acquisition of ASM Foods AB in Sweden in January 2013; (2) outsourcing contract wins with Arcor-Dos en Uno and Morinaga, which had a combined investment requirement of CHF31.5 million (EUR26.2 million); and (3) CHF41.8 million (EUR34.5 million) of capacity investments in Turkey and North America. These are in addition to other investments made during H1 FY2012 and are in the context of CHF212 million of RCF generated by the company in FY2012. Barry Callebaut has been free cash flow negative (within the range CHF23-137 million) in five of the seven previous financial years, on the back of its capital-intensive business model. Management is likely to be pressured in successfully delivering on all recent investments, absent the Petra acquisition.

Offsetting some of these concerns are the added diversity and opportunities the acquisition provides for Barry Callebaut. Moody's recognises that the acquisition of Petra's Cocoa Ingredients Division will (1) make Barry Callebaut the largest global cocoa processor, in terms of sales volume; (2) augment Barry Callebaut's existing production of semi-finished chocolate products; (3) secure an alternative source of cocoa supply, as well as capacity for recent and prospective outsourcing contract wins; and (4) increase the company's presence in cocoa powders and in emerging markets, where chocolate market growth rates are highest.

Barry Callebaut has a solid business profile, a result of (1) the company's established leading position in the key global chocolate markets; (2) the traction it has gained in emerging markets; and (3) it benefiting from a largely cost-plus business model. An additional positive consideration is Barry Callebaut's good liquidity profile, with debt maturities for existing financial liabilities well spread and no significant refinancing needs over the next 12-18 months (other than the bridge loan for the Petra transaction). However, in addition to an increase in financial leverage, the Petra transaction weakens the company's business profile, albeit not materially, as a result of anticipated lower EBITDA margins (pre-synergies) and increased goodwill.

- Ba1 CFR

Barry Callebaut's Ba1 rating reflects the fact that recent acquisitions, infrastructure investments and costs associated with outsourcing contracts have weakened Barry Callebaut's key credit metrics, which we expect to remain in high-yield territory for the foreseeable future. Further, the Petra transaction -- which the company expects to complete in summer 2013 -- will test Barry Callebaut's ability to turn around the financial performance of a large business. Barry Callebaut is reliant on politically unstable countries such as Côte d'Ivoire for the supply of cocoa beans. Whilst we recognise that the political situation in Côte d'Ivoire has stabilised since the turmoil in 2011, and that Barry Callebaut has begun diversifying to countries with a more stable political environment such as Malaysia and Indonesia (and Brazil through the Petra acquisition), the company remains significantly exposed to politically unstable countries. This adds to existing supply disruption risks, although these are inherent to the industry.

However, more positively, the rating also reflects Barry Callebaut's established presence in all major global markets, and its focus on diversifying the current Europe-based revenues towards new markets such as Brazil, Russia, India, China and Mexico, which typically display higher growth prospects. Through the Petra acquisition, Barry Callebaut will further expand its operations in Singapore and Indonesia and gain new facilities in Thailand. The company's rating also reflects the resilience of its hedging policy to volatile cocoa bean prices. Barry Callebaut's cost-plus business model, which covers around 80% of its sales volumes, has proved successful in recent years and enabled it to sustain fairly stable operating margins levels, despite volatile cocoa bean prices. Moody's expects that Petra's less successful cocoa hedging strategies will be replaced by Barry Callebaut's.

- Ba1 SENIOR UNSECURED INSTRUMENT RATINGS AND Ba1-PD PDR

Barry Callebaut's Ba1 senior unsecured instrument ratings are in line with the CFR. This reflects the lack of significant structural subordination and that they are fully guaranteed by Barry Callebaut AG. The company's probability of default (PDR) rating of Ba1-PD reflects the use of a 50% family recovery rate, consistent with a bank and bond capital structure.

OUTLOOK

The stable outlook on the ratings reflects Barry Callebaut's solid business profile and operating performance. It also reflects Moody's expectation that the company's key credit metrics will weaken over the next three to five financial years if the Petra acquisition completes. Regardless of whether or not the transaction closes, Moody's expects Barry Callebaut's metrics to weaken over the next 12-18 months as a result of the company's recent significant investment activity. To the extent that deleveraging is delayed beyond the expected timeframe, the company's ratings would likely experience downward pressure.

WHAT COULD CHANGE THE RATING DOWN/UP

Negative pressure could be exerted on the rating if Barry Callebaut's credit metrics were to remain weak, with adjusted RCF/net debt in the mid-teens in percentage terms and adjusted leverage above 3.75x and, if the company failed to maintain its adjusted EBITDA margins at high single-digit levels, or if Moody's had renewed concerns with regard to supply risk. Conversely, although not expected in the short term in view of today's action, positive rating pressure could develop if Barry Callebaut were able to deliver improved credit metrics, with adjusted RCF/net debt above 20%, adjusted leverage trending towards 3.0x, and improve its adjusted EBITDA margins towards double-digit levels, all on a sustainable basis and in conjunction with increased diversification of raw materials supply.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was the Global Food - Protein and Agriculture Industry published in September 2009. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Headquartered in Zurich, Switzerland, and with reported annual sales of CHF4.8 billion (approximately EUR4.0 billion) for financial year (FY) 2011/12 (ended 31 August), Barry Callebaut AG is the world's leading supplier of premium cocoa and chocolate products, servicing customers across the wide spectrum of the global food industry.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Andreas Rands
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Paloma San Valentin
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades Barry Callebaut's ratings to Ba1; stable outlook
No Related Data.

 

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