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Rating Action:

Moody's assigns (P)Ba3 rating to Tereos's proposed bond issuance; stable outlook

26 Feb 2013

London, 26 February 2013 -- Moody's Investors Service has today assigned a provisional (P)Ba3 long-term rating with a loss given default assessment of 4 (LGD4) to Tereos's proposed issuance of senior unsecured bonds due 2020. All other ratings and outlook remain unchanged. The size and completion of the bond issuance remains subject to market conditions. Moody's understands that Tereos will use the proceeds of the proposed issuance to pre-fund the upcoming maturity of its EUR500 million of senior secured notes due April 2014.

"The (P)Ba3 rating we have assigned to Tereos's senior unsecured bonds is one notch below the group's Ba2 corporate family rating, which reflects that the bonds are subordinated to the group's substantial senior secured bank facilities," says Andreas Rands, a Moody's Vice President - Senior Analyst and lead analyst for Tereos.

Moody's understands that the bonds are being issued by Tereos Finance Groupe I, a special purpose vehicle created to issue the bonds. Tereos Finance Groupe I is wholly owned by Tereos UCA, the holding company of Tereos. Moody's further understands that the bonds are unconditionally and irrevocably guaranteed by Tereos UCA ('Tereos' or 'the group'), such that the guarantee is provided by entities covering all of the group's EBITDA and assets. The rating agency further understands that Tereos has successfully secured the refinancing of Tereos UCA's and Tereos EU's bank credit facilities. Moody's understands that the security attached to the notes due April 2014 will fall away post-refinancing. Such that, once the new credit facilities close and fund, Moody's expects the proposed bonds to rank pari passu with the EUR500 million of senior secured notes due April 2014 which will only be amortised at maturity.

Moody's issues provisional ratings in advance of the final sale of securities and these ratings reflect Moody's preliminary credit opinion regarding the transaction only. Upon a conclusive review of the final documentation, Moody's will endeavour to assign a definitive rating to the bonds. A definitive rating may differ from a provisional rating.

RATINGS RATIONALE

The (P)Ba3 rating assigned to the senior unsecured bonds is one notch below the group's Ba2 corporate family rating (CFR), reflecting the subordinated nature of the bonds relative to the group's substantial drawn senior secured bank facilities, which Moody's understands amount to approximately EUR1.4 billion as at 30 September 2012.

Whilst Tereos's existing EUR500 million of senior secured notes will remain in place after the proposed senior unsecured bond issuance, Moody's understands it will only be for a short period of time, pending maturity in April 2014.

Tereos's Ba2 CFR reflects (1) the firm's significant and growing exposure to commodity price volatility as it expands outside of the regulated European sugar market; (2) high capital expenditure (capex), as the group invests to increase production capacity in its international markets, as well as its production flexibility and efficiency improvements in Europe, all of which constrains debt reduction; (3) currently tight covenant headroom at the Tereos EU level (albeit we understand this will be resolved by the proposed bank debt refinancing); and (4) uncertainties surrounding the regulatory environment for sugar producers in the EU over the medium- to long-term horizon.

However, more positively, the rating also reflects (1) Tereos's market position as the third-largest sugar producer in Europe; (2) its pre-eminent position in the French beet sugar industry, one of the most competitive in Europe; (3) its diversification by geography (Europe and Brazil), product (cane sugar, beet sugar, ethanol, alcohol and starch) and end use (food, fuel and industrial applications); and (4) its stable sources of raw materials, the result of its co-operative structure in Europe and its long-term supply contracts and partial vertical integration in Brazil.

Moody's expects that Tereos will use the proceeds of the proposed bond issuance to refinance the upcoming maturity of the EUR500 million of senior secured notes due 2014. The rating agency further understands that the group has successfully secured the refinancing of a significant amount of its senior secured bank debt due over the next two calendar years. It is also in the process of completing an internal reorganisation to simplify its group structure. As part of this process, Tereos UCA will transfer its French sugar beet assets and liabilities to Tereos France. Moody's notes the transfer is subject to shareholder and workers' council approvals, amongst other things, but the group expects it to conclude around 30 September 2013. Moody's also notes that Tereos proposes to change its financial year-end to 31 March as at 31 March 2013 and thereafter. This aligns the year-end of all divisions across the group. This change is also subject to approval at the forthcoming shareholder meeting in March 2013. Subject to successful completion of both the bond and bank debt refinancing, we expect that Tereos's liquidity profile will improve considerably. Whilst the proposed refinancing is credit positive, it is not rating positive due to the constraints highlighted above.

Moody's notes that Tereos has recently delivered a strong set of FY2011/12 results. Reported sales of EUR5.0 billion were up 14% on the previous year, principally due to the group's Sugarbeet operations. Tereos achieved record beet yields and continued to benefit from high and rising EU sugar prices. Due to the combination of volume and price increases, on a fixed cost base, the group's reported adjusted EBITDA (before price complements) increased by 20% to EUR904 million. In addition, Tereos's reported adjusted EBITDA margin increased slightly to 17.9% from 17.1% in the previous year. Moody's further notes that the group has built up good balance-sheet cash over the past couple of financial years, to EUR367 million in FY2011/2012 from EUR240 million in FY2009/2010.

Despite this improved performance, Tereos's Moody's-adjusted gross debt/EBITDA has been fairly stable over the past two financial years at 3.5x in FY2010/11 and 3.2x in FY2011/12. This is in the context of the group's continued high appetite for expansion. In 2011 and 2012, Tereos made acquisitions in Brazil (Halotek: R$45 million: EUR17.2 million), France (Haussimont potato starch production plant) and the Czech Republic (acquisition of a distillery in Moravia) and is in the process of completing an acquisition in Romania (Ludus sugar plant). Moody's notes that Tereos's reported capex increased substantially in FY2011/12, to EUR653 million from EUR460 million in the previous year. Tereos is directing this capex at the expansion of its Sugarcane and Cereal divisions, amongst other things.

Further, Moody's notes that key sections of the EU sugar regulations which cover the group's core Sugarbeet operations (approximately 43% of reported sales and around 56% of reported adjusted EBITDA) are due to expire in September 2015. At present, a rollover of the current system to 2020 seems most likely.

OUTLOOK

The stable outlook reflects Moody's view that expected deleveraging and improved cash generation will leave Tereos solidly positioned over the next 12-18 months and that the group's metrics may improve further on the back of supportive industry conditions. Moody's notes that Tereos's pursuit of growth is likely to preclude significant reductions in the absolute amount of debt on its balance sheet, leaving improvements due to increases in EBITDA vulnerable to reversal. Moody's will continue to monitor Tereos's execution of its partnership with Petrobras and any further expansion by the former into Brazil or elsewhere. The current rating and outlook assume the absence of any material debt-financed acquisitions or aggressive shareholder distributions, and that Tereos will use the proposed bond to refinance the EUR500 million of senior secured notes due 2014. Over the coming 12-18 months Moody's would expect Tereos to build on its cash balances and further improve its financial flexibility to ensure that it builds a cushion to sustain strong "through the sugar cycle" credit metrics.

WHAT COULD CHANGE THE RATING UP/DOWN

Despite the risks involved in Tereos's expansion, positive pressure on the rating or the outlook could develop during the next 12-18 months as a result of the positive dynamics in the EU sugar market. However, positive rating pressure would be reliant on (1) Tereos further strengthening its operating performance and cash flow generation over a sustained period whilst continuing to deleverage, with a debt/EBITDA ratio (as adjusted by Moody's) comfortably below 3.0x on a sustained basis; (2) there being increased visibility with regard to the group's financial policies going forward, as well as clarity concerning the regulatory environment in the context of the potential reform of EU sugar market regulations, given that key sections expire as of 30 September 2015; and (3) the group building on its cash balances and financial flexibility cushion to ensure that it can sustain strong "through the sugar cycle" credit metrics.

Conversely, although not expected in the short term, negative rating pressure could develop if (1) Tereos's adjusted debt/EBITDA ratio were to remain above 3.5x on a consistent basis; (2) its liquidity were to become constrained (including, but not limited to, through weaker covenant headroom); or (3) Moody's were to become concerned about the group's ability to access credit facilities. Any material debt-financed acquisitions or aggressive shareholder distributions could also exert downward pressure on the rating.

PRINCIPAL METHODOLOGY

The principal methodology used in this rating was the Global Agricultural Cooperatives Industry published in August 2010. 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 Lille, France, Tereos is the third-largest European producer of sugar from sugar beet, the third-largest European producer of starch and the largest alcohol and ethanol producer from cereals in Europe, and the third-largest Brazilian sugarcane processor. The group posted FY2011/12 revenues of EUR5.0 billion.

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 assigns (P)Ba3 rating to Tereos's proposed bond issuance; stable outlook
No Related Data.
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