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Rating Action:

Moody's assigns Baa3 rating to Nutrition & Biosciences, Inc.'s new senior unsecured notes

10 Sep 2020

New York, September 10, 2020 -- Moody's Investors Service, ("Moody's") assigned a Baa3 rating to Nutrition & Biosciences, Inc.'s ("N&B") new senior unsecured notes. The Baa3 ratings of International Flavors & Fragrances, Inc. ("IFF") and its Prime-3 rating for commercial paper remain unchanged. The outlook is negative for IFF.

"The successful debt placement would be another major step towards achieving the transformative merger despite the high initial leverage and integration risk once the transaction closes," said Domenick R. Fumai, Moody's Vice President and lead analyst for IFF.

Assignments:

..Issuer: Nutrition & Biosciences, Inc.

.... Gtd. Senior Unsecured Regular Bond/Debenture, Assigned Baa3

RATINGS RATIONALE

The Baa3 rating assigned to the new unsecured notes of Nutrition & Biosciences, Inc., does not reflect its current credit profile as a subsidiary of DuPont de Nemours, Inc. ("DuPont"; Baa1, stable). The rating incorporates its expected credit quality after its merger with IFF in a Reverse Morris Trust transaction, which is likely to occur in the first quarter of 2021. The Baa3 rating also reflects the expectation that this debt will be guaranteed by IFF upon closing of the merger, and will subsequently become pari passu with IFF's existing debt via either IFF assuming the debt or providing cross-guarantees. The merger has received IFF shareholder approval and is expected to close in February 2021. The new debt will remain on N&B's (a subsidiary of DuPont) balance sheet until the merger is completed, but will not be guaranteed by DuPont. Moody's expects the net proceeds from the new notes, in addition to term loan proceeds raised in a separate financing transaction, to be applied towards the approximate $7.3 billion special one-time payment to DuPont at the closing date of the merger. The proceeds of the notes will be held in a segregated escrow account for the benefit of the noteholders and contain a Special Mandatory Redemption (SMR) provision, which would require the issuer to redeem the notes at a price of 101% of the aggregate principal amount of the notes plus accrued interest if the merger does not occur by September 15, 2021.

The negative outlook reflects expectations for the combined entity's leverage to remain high for the rating following the proposed transaction despite the large amount of equity that will be used to finance the merger. Moody's estimates pro forma Debt/EBITDA for the combined entity will be 4.8x at the end of 2020. However, Moody's expects IFF to reduce debt towards 3.5x by the end of 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 2018 acquisition of Frutarom, the size and timing of this transaction will present 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.

IFF's 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, allowing 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 will have excellent liquidity after the close of the merger with a $2 billion revolving credit facility that will likely be undrawn. As part of the upsized revolver, IFF has expanded the leverage covenant to a maximum Net Debt/EBITDA ratio of 4.75x through the end of 2021 (technically through the third quarter after completion of the merger) stepping down to 4.5x for the first three quarters of 2022 (technically for the fourth fifth and sixth quarters after the merger), and then 3.75x for the seventh, eighth and ninth full quarters after the closing date and will be 3.5x thereafter. Moody's also expects IFF to maintain sufficient cash balances of at least $400 million over the next 12 months.

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.

Nutrition & Biosciences, Inc., a subsidiary of DuPont de Nemours, Inc., is a producer of specialty ingredients and operates in three main business segments, including Food & Beverage, Health & Biosciences and Pharma Solutions and is expected to merge with IFF in 2021. The company had sales of approximately $6.1 billion for the twelve months ended June 30, 2020.

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.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

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

No Related Data.
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