MOODY'S ASSIGNS FIRST TIME PROSPECTIVE SENIOR LONG TERM RATINGS Baa1 (P) TO BEGHIN-SAY AND WILL WITHDRAW ERIDANIA-BEGHIN-SAY Baa1 AND PRIME-2 RATINGS
Paris, May 31, 2001 -- Moody's Investors Service assigned Baa1 (P) Prospective Senior Long Term ratings and a Prime-2 (P) Prospective Short Term rating to Beghin-Say , and at the same time indicates that it will withdraw the Eridania-Beghin-Say (EBS) ratings that had been put under review on 30 November 2000 , upon completion of EBS's demerger. The new Beghin-Say rating assumes that the transactions, proposed by EBS management to shareholders and bondholders, will be completed substantially as proposed.
The rating reflects the limited degree of cyclicality and the strong cash generation capacity of the company in a protected European environment, which largely isolates the company from fluctuating and low sugar world prices. It also recognizes that the high indebtedness at year end is mitigated by the seasonal character of the debt profile and the fact that this debt finances to a large extent inventories whose value is ultimately supported (for the larger part) by the European intervention price. Though the sugar activity has strong cash-flow caracteristics, the Beghin-Say rating takes into account the loss of diversity in its operations and cash-flow that existed prior to demerger of other activities. The rating also reflects the uncertainties regarding the consequences of the new EU Regime that has just been approved by the European Council of Ministers. The outlook is negative.
The Baa1 senior debt and Prime-2 short term ratings of EBS and of its guaranteed subsidiaries were placed under review for possible downgrade in November 2000 following the announcement that EBS intended to split into four separate legal entities focussed on each of the company's major business lines: sugar and derivatives; starch and derivatives; oilseed processing, food oils, protein and lecithins; and animal nutrition. This process is going to be submitted to the shareholders in June 2001 as well as to the bondholders of EBS. Moody's expects the split into four entities to be approved by shareholders due to the majority control by Montedison.
Following the completion of this process, EBS's ratings currently under review for possible downgrade will be withdrawn. The company plans to repay commercial paper issues as they mature and the Prime-2 rating will be withdrawn upon cancellation of the CP program. The bulk of the existing bonds (including all the Euro Medium Term Notes) issued by EBS should be assumed by Beghin-Say after the de-merger.
Moody's views the French operations of Beghin-Say as among the most efficient within the European Sugar market thanks to the high efficiency of Beghin-Say industrial assets with high beet slicing capacities for each of the 9 plants being in excess of 10 000 tons per day (including the plant with the higher capacity in the world). Beghin-Say also enjoys favorable agronomic conditions for beet growing in France generating yields among the best in Europe. Beghin-Say holds a leading position in the French market with one third of the production. Nevertheless the Italian operations, remain marginally profitable despite an on-going restructuring process. It should be noted though that the operating conditions in Italy are less favorable, and as a result it is not expected that Italy will ever generate the same profitability as in France. Beghin-Say is the second European producer with a regulated quota of 1.9 million tons (13% of the total European quota). Beghin-Say holds also some of the stronger brands of the retail markets of France, Italy and Hungary. In addition Beghin-Say holds also a cane sugar refinery in France and has alcohol production capacities in France and Italy. The operating profit of Beghin-Say is essentially generated by the French Beet Sugar operations.
The new EU Sugar Regime will apply from 1 July 2001 and will have a duration of 5 years but with possible amendments proposed after 2 years if necessary. Apart from limited reductions of quotas to comply with World Trade Organization commitments, the main change for the European Sugar Producers relates to the removal of the storage refund system (estimated around EUR 35 million annually for Beghin-Say of which around 8 million on exports). Though Moody's considers this is likely to erode the operating margin of Beghin-Say, management is confident in its capacity to pass the storage costs on to its European final customers. Indeed this would not require price increases for the consumers as far as the refund is financed by a levy paid by the consumers. Moody's considers that maintaining the margins in the retail segment might therefore be possible but European Sugar producers may have more difficulties to resist the pressure of their large industrial customers and will lose the refund on the exported sugar. Going forward the regulatory environment will not offer conditions as favorable as in the past due to the World Trade Organization commitments of the E.U. and also the opening of the market to the less advanced countries which could add to the long term pressure on the market conditions in the European Union. The likely entry of Eastern European countries in the EU might also weaken the existing conditions, albeit it is not known at this stage whether the impact will be material in particular in the level of the intervention price, which is not being modified for the time being.
Overall Moody's views the long-term outlook for the European sugar industry as negative, albeit the evolution is likely to be slow. Moody's considers that a possible diversification in the cane sugar, through an investment in Brazil currently contemplated, as well as existing small operations in Hungary would represent a minor mitigant for this exposure to the European sugar Regime. However the approved renewal of the European Regime reduces the uncertainties for the next 5 years and in particular the risk of a rapid liberalization of the European market. The Baa1 rating assumes also that the financial structure and debt protection measurements should improve going forward thus somewhat balancing the future possible reduced cash-flow generation capacity of the operations in the European Union. The current rating does not factor in other meaningful debt-financed acquisitions.
The possible impact of the removal of the storage refunds as well as, usual uncertainties related to an acquisition (in Brazil) and to the enhancement of the profitability of the Italian operations are reflected in the negative outlook.
The following ratings have been assigned:
Beghin-Say: Baa1 (P) rating for Euro medium term note program and all outstanding drawdowns.
Beghin-Say: Baa1 (P) rating for ITL 350 billion Euronotes due 2004.
The following ratings will be withdrawn upon completion of contemplated transactions:
Eridania Béghin-Say: Baa1 rating for Eurobonds, Euronotes, and Euro medium term note program; Prime-2 rating for commercial paper.
Cerestar USA Inc.: Baa1 rating for guaranteed senior notes.
Cerestar USA Inc.: Baa1 rating for guaranteed industrial revenue bonds.
Eridania Beghin-Say SA/NV: Prime-2 rating for commercial paper guaranteed by EBS.
Based in Neuilly-sur-Seine, France, Béghin-Say is a major European Beet Sugar processor and had pro-forma revenues of Euro 1.9 billion in 2000.
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