New York, September 08, 2020 -- Moody's Investors Service, ("Moody's") affirmed
the Baa3 ratings of International Flavors and Fragrances, Inc.
("IFF") and its Prime-3 rating for commercial paper.
The outlook remains negative.
"The affirmation reflects the benefits of the merger with DuPont's
Nutrition and Biosciences including increased scale and product offering
offset by the increased leverage and credit metrics that are elevated
for an investment-grade rating and challenges related to integrating
the two companies," said Domenick R. Fumai, Moody's
Vice President and lead analyst for IFF.
Affirmations:
..Issuer: International Flavors & Fragrances,
Inc.
.... Issuer Rating, Affirmed Baa3
....Senior Unsecured Commercial Paper,
Affirmed P-3
....Senior Unsecured Regular Bond/Debenture,
Affirmed Baa3
Outlook Actions:
..Issuer: International Flavors & Fragrances,
Inc.
....Outlook, Remains Negative
RATINGS RATIONALE
The affirmation reflects International Flavors and Fragrances, Inc.'s
strong market position following the anticipated closing of the merger
with DuPont De Nemours, Inc's. (DuPont) Nutrition and Biosciences
(N&B) business sometime in the first quarter of 2021. The combined
company will have sales in excess of $11 billion and EBITDA of
more than $2.6 billion. IFF will hold leading market
positions in a number of categories including taste, scent,
cultures, enzymes and probiotics and will significantly increase
scale and product offerings as well as expand its customer base following
the combination further strengthening the company's business profile.
The affirmation also factors the stability of the combined businesses
relative to most other investment grade chemical companies in the current
pandemic, as well as management's commitment to maintaining
an investment-grade rating with clearly stated leverage targets,
suspending share repurchases until such targets are reached and aligning
senior management's compensation with achieving debt reduction.
The negative outlook reflects expectations for leverage to remain high
for the rating following the proposed transaction which is expected to
close in the first quarter of 2021 despite the large amount of equity
that will be used to finance the proposed acquisition. Nutrition
& Biosciences, Inc. will be the issuer of the new debt,
which will remain on DuPont's balance sheet until the merger is completed,
but will not be guaranteed by DuPont. This debt is also expected
to be pari passu with IFF existing debt as following the close of the
transaction, IFF will guarantee the debt. The proposed transaction
significantly increases debt on the balance sheet by approximately $7.5
billion, of which $7.3 billion will be a dividend
to DuPont. After a period of progress deleveraging post the Frutarom
acquisition, Debt/EBITDA, including Moody's standard
adjustments, which is 4.3x as of June 30, 2020,
increases once again. Moody's estimates pro forma Debt/EBITDA
for the proposed transaction of 4.8x in FY 2020. However,
Moody's expects the company to reduce debt towards 3.5x in
2022 through increased free cash flow generation as it begins to recognize
cost and revenue synergies resulting from the merger. The negative
outlook also considers significant integration risk associated with the
proposed transaction. While Moody's believes IFF has made
sufficient headway integrating the acquisition of Frutarom completed in
October 2018, the size and timing of this transaction presents challenges
integrating the two companies. Moody's expects the Frutarom
integration to be substantially complete by the time the transaction closes,
which should allow management to focus on N&B. The integration
risk is partially offset by the long lead time the company has had from
the time of the announcement to when the transaction closes. IFF
is targeting cost synergies of $300 million, which Moody's
views as attainable because of the relatively complementary nature of
the merger despite the substantial cost of $355 million estimated
to capture the synergies.
An outlook revision to stable is not likely over the next 12 months given
the anticipated time frame to monitor the progress of the integration.
However, Moody's could revise the outlook to stable after
full year 2021 results are published if the integration appears to be
on track, including cost and revenue synergies, if the company
generates more than $500 million of free cash flow in 2021 and
reduces debt by a similar amount and if management maintains its commitment
to conservative financial policies.
The Baa3 rating is supported by the company's leading market positions
in a number of categories that it competes in, with a portfolio
of products that are fairly resilient to economic downturns, which
allows the company to currently operate with higher leverage compared
to more cyclical peers such as Albemarle Corporation (Baa3 stable) and
RPM International Inc. (Baa3 stable). Approximately 85%
of IFF's end markets are in categories that have not been impacted
by the pandemic. The remaining 15%, including Fine
Fragrances, Food Service and Cosmetic Actives are more discretionary
items and have been severely impacted by COVID-19, thus resulting
in IFF's second quarter sales and EBITDA decline, but are
expected to gradually recover as restrictions have been eased and the
global economy rebounds. Moody's believes DuPont's
N&B business also has similar characteristics with significant exposure
to food and beverage and health products. IFF's strong R&D
platform is further enhanced by DuPont N&B's expertise in faster
growing, higher margin segments including enzymes, cultures
and probiotics. The rating also incorporates management's
explicit financial policy, which includes the company's public
commitment to maintaining an investment-grade rating, with
an adjusted Net Debt/EBITDA leverage target of less than 3.0x based
on management's calculations by year two post-transaction
close from pro forma Net Debt/EBITDA of 4.4x at close. The
company will also suspend share repurchases until such target is achieved.
IFF maintains excellent liquidity with a $1 billion revolving credit
facility that is currently undrawn as of June 30, 2020, and
will be upsized to $2 billion at the close of the transaction.
IFF is in compliance with the maximum Net Debt/EBITDA covenant of 4.0x
that is in effect until the quarter ending December 31, 2020,
and will step down to 3.75x until the end of the quarter ending
June 30, 2021. IFF has obtained an amendment following the
close of the N&B transaction to a maximum Net Debt/EBITDA ratio of
4.75x for the full first, second and third quarters after
the closing date stepping down to 4.5x at the end of the full fourth,
fifth and sixth quarters post the closing date. Moody's also
expects IFF to maintain sufficient cash balances of at least $400
million over the next 12 months.
ESG CONSIDERATIONS
Moody's also considers environmental, social and governance
factors in assessing ratings; however, they are not material
to this rating action. In 2019, IFF discovered a compliance
issue regarding illegal payments in Russia and Ukraine. IFF immediately
conducted a comprehensive internal investigation and has addressed the
breach in a timely and sufficient manner with minimal cost or disruption.
Although the incident was limited to a few individuals, including
several senior Frutarom employees, management has reinforced the
importance of adhering to its compliance policy throughout the entire
company. Despite the incident, IFF has a well-developed
corporate governance policy as a public company with an independent board
of directors, sound financial disclosure and well-articulated
financial and operating strategies.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's would consider upgrading the ratings if the company achieves Moody's
adjusted financial leverage meaningfully below 3.0x (Debt/EBITDA)
on a sustained basis and retained cash flow to debt sustained above 20%.
An upgrade would also require demonstrated progress towards successfully
integrating N&B, including attaining cost and revenue synergies.
Moody's would also require management to strengthen financial metrics
further prior to any large transaction.
Moody's could downgrade the ratings if adjusted leverage (based
on Moody's calculations) remains above 3.5x (Debt/EBITDA)
two years after the closing, if free cash flow is not applied to
absolute debt reduction, or retained cash flow to debt (RCF/Debt)
remains below 10% on a sustained basis, there is insufficient
progress integrating N&B, failure to achieve demonstrated progress
towards the cost synergy target, or the company pursues a more aggressive
financial policy including another sizable debt-financed acquisition
or more shareholder-friendly actions such as resuming the share
repurchases program before reaching Moody's deleveraging forecast.
Additionally, Moody's could downgrade the rating by the end
of 2021, if leverage is not on track to decline meaningfully below
4.0x, retained cash flow to net debt remains below 10%
and 2021 free cash flow is below $350 million.
International Flavors & Fragrances, Inc. (IFF) headquartered
in New York, is a leading creator and manufacturer of flavors and
fragrances used by other manufacturers to impart or improve the flavor
or fragrance of a wide variety of consumer products. IFF generated
approximately $5.1 billion of revenue for the twelve months
ended June 30, 2020.
The principal methodology used in these ratings was Chemical Industry
published in March 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1152388.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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 credit rating action on the
support provider and in relation to each particular credit 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 credit rating action,
and whose ratings may change as a result of this credit 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.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
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.
Domenick Fumai
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Glenn B. Eckert
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
