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29 Jul 2008
New York, July 29, 2008 -- Moody's Investors Service changed the outlook for Bunge Ltd.'s
long-term debt to stable from negative, including the guaranteed
debt of subsidiaries rated Baa2; and the preferred stock of Bunge
Ltd., rated Ba1. The rating outlook for the senior
long-term debt of Corn Products International, Inc.,
rated Baa2, also was changed to stable from negative. The
stabilized rating outlook is in response to Bunge's improving earnings
and cash flow profile, the expected operating and financial benefits
from its pending acquisition of Corn Products, and an adequate approach
to liquidity management, despite a significant increase in debt
levels associated with rising working capital requirements.
Bunge's earnings and cash flows, as well as fixed charge coverage
measures, have reached record levels over the past year, driven
primarily by improved agribusiness and fertilizer results. In the
first half of 2008, earnings and cash flow before changes in working
capital benefited from stronger margins in agribusiness and improved fertilizer
profitability stemming from record high commodity prices for soybeans
and corn, which have doubled in the past year; an 8%
increase (last twelve months) in overall commodity volumes, led
by agribusiness and food products; and a rebound in the Brazilian
farm economy and strong demand for fertilizer. Crush margins in
oilseed processing have risen, and price increases have been sustained
in Bunge's wheat milling and edible oils operations, which
should help offset higher input costs.
In addition, the pending acquisition of Corn Products will be favorable
to Bunge's operational and financial position, adding a strong presence
in the corn value chain, broader geographic and product line diversification,
and more than $4 billion of equity to the combined balance sheet
based on the equity financing. Going into the second half of 2008,
a strong performance can be expected for Bunge, although soybean
and corn prices have recently declined modestly, which could adversely
affect fertilizer operations. However, working capital carrying
costs, rising energy costs, and a potential slow down in demand
by agribusiness customers in response to rising prices could have a negative
impact on results.
Despite the benefit of stronger earnings and cash flow coverages,
Bunge's merchandising and processing operations are highly working
capital intensive, particularly in rising price markets, requiring
financing for inventories and collateral posting to meet margin calls
on its futures hedging activities. As a result, the company's
cash flow from operations after working capital changes has been consistently
negative. Total debt has increased significantly, rising
more than $2 billion since the end of 2006. As such,
working capital management will continue to be a challenge for Bunge.
At the same time, Bunge's readily marketable inventories (RMI)
have increased in value, and the company's core debt has remained
fairly steady, excluding working capital-related borrowings.
Moody's analysis recognizes that RMIs provide liquidity support
and that higher working capital needs will reverse and should self-liquidate
in the event of a decline in commodity prices and reduced merchandising
opportunities, as has happened in the past.
From a leverage perspective, RMIs can also be viewed a providing
some partial offset to rising debt levels and financial leverage.
Moody's will continue to analyze Bunge's financial leverage
both before and after an adjustment for RMIs, the latter at an ongoing
level of 50% of its total disclosed RMIs. A haircut to total
disclosed RMIs as a debt offset is appropriate, given the volatility
of commodity prices and cash flows, the need for inventories in
Bunge's core oilseed processing operations, changing working
capital needs, and uncertainty over the timing and realized values
in orderly liquidation scenarios.
In light of market volatility and high working capital demands,
backup liquidity will remain a key element of Bunge's investment
grade profile. Moody's believes that Bunge manages its liquidity
adequately, primarily via a group of committed bank credit facilities
sized to meet margin calls and other large stress liquidity events,
even as it benefits from the asset support provided by its RMIs.
However, these facilities have conditionality features that could
affect access to liquidity in adverse situations. In addition,
changing market and working capital demands, particularly when commodity
prices rise, could challenge the company's ability to access
new funding sources and expand its merchandising and processing franchises.
Bunge will have to stay out in front of these rising requirements.
To date, the company has continued to successfully access new liquidity,
including $950 million in new three-year financings during
the first quarter of 2008. In that regard, continued discipline
in managing the level of its merchandising activities and access to alternative
liquidity, as well as adverse liquidity events, could all
be drivers in future outlook or rating changes for Bunge.
Headquartered in White Plains, New York, Bunge Ltd.
is a leading global agribusiness company with operations primarily in
commodity grain processing and fertilizer production.
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Moody's Changes Bunge Ltd. Rating Outlook to Stable
Thomas S. Coleman
Senior Vice President
Corporate Finance Group
Moody's Investors Service
No Related Data.
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