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Rating Action:

Moody's changes Suedzucker's rating outlook to negative; Baa2 ratings affirmed

05 Apr 2018

Milan, April 05, 2018 -- Moody's Investors Service has today changed to negative from stable the outlook on the Baa2 long-term issuer ratings of Suedzucker AG ('Suedzucker' or 'the company'). All ratings, including the long-term issuer rating of Baa2 and the short-term Prime-2 ratings of Suedzucker and of Suedzucker International Finance B.V. have been affirmed. Additionally Moody's has also affirmed Suedzucker International Finance B.V's junior subordinated rating of Ba2.

"The negative outlook follows the company profit warning announcement on 26th of March and our expectation that weakness in sugar prices for more than 12 months, both globally and across Europe, might result in a structural decline in the company's profitability and cash flow generation", says Paolo Leschiutta a Moody's Senior Vice President and lead analyst for Suedzucker. "Our assessment of the company's credit quality will depend on how well the company adapts to a lower pricing environment following the liberalization of the sugar market across the EU and ongoing low world sugar prices including in terms of management of breakeven point and cash as well as financial policies", added Mr Leschiutta.

RATINGS RATIONALE

Suedzucker is expecting a significant drop in its consolidated operating profit for the year ending February 2019. The drop will result from an operating loss of around €100-200 million in its sugar division which will drive an overall profit decline to around €100-200 million from around €440 million reported during FYE February 2018 based on preliminary figure published on 26 of March (and €426 million in February 2017).

The expectation for the lower profitability follows the decline in both world and EU sugar prices on the back of ongoing oversupply in the market and the EU sugar market liberalisation in October last year, with prices across the EU, in particular, reaching the lowest level since the implementation of the EU sugar price reporting in 2006. As of January 2018 white sugar across the EU was valued at €374 per tonne as an average.

Sugar prices in recent months have dropped below Moody's expectations. In addition to that, the rating agency was also expecting Suedzucker to be able to compensate for lower prices with higher volumes and a more flexible cost structure. Higher production volumes after quota abolishment across the EU are leading to increasing export activities and increases in Suedzucker's plants utilisation. Furthermore, sugar producers across the EU, like Suedzucker, are not obliged to pay any longer beet farmers a minimum price of €26.29 a tonne, which has a positive effect as it reduces variable costs. Higher volumes and lower variable costs have not been enough, however, to compensate for the material negative impact from the historic low EU sugar prices.

Based on the new company's estimates, Moody's believes that Suedzucker' financial leverage, measured as Moody's adjusted (gross) debt to EBITDA, might increase above 4.5x at the end of FYE Feb 2019. This is well above the rating agency's assumptions currently built into the Baa2 rating and above the maximum of 3.5x over time tolerated at the Baa2 rating. The level, however, is similar to that of 2015 and 2016 when the company's profitability was under pressure due to low sugar prices across the EU, with a Moody's adjusted leverage of 4.8x and 4.0x respectively. Our expectation was that of a greater resilience gained by the company after that last bout of volatility through in particular a lower breakeven point.

To the extent that the company is unable to provide enough evidence of its capability to restore profitability and that sugar prices remain depressed for a prolonged period of time, the rating of Suedzucker could come under negative pressure. In particular a leverage above 4.5x is seen as unsustainable for the current rating level. Suedzuker's current credit metrics offer only a degree of flexibility to tolerate temporary deterioration as Moody's estimates that its debt to EBITDA, as adjusted by Moody's, was around 3.0x at FYE 2018 (including full year contribution of Richelieu Moody's was expecting a leverage below 2.5x). The company's EBITDA, however, includes only few months contribution from the acquisition of Richelieu Foods, a US-based private-label frozen pizza manufacturer acquired for $435 million on first December 2017.

On the positive side, we note that despite a high degree of uncertainty over the short term, following a period of price volatility Moody's expects the supply and demand in the sugar market to become more balanced, leading possibly to a recovery in sugar prices. Moreover, the company's increased diversification into non sugar related activities in recent years help compensate, to some extent, for weaknesses in the sugar activity.

STRUCTURAL CONSIDERATIONS

The Ba2 rating on Suedzucker International Finance B.V's €700 million junior subordinated notes reflects the still good headroom under the cash flow trigger of the notes, which is unlikely to result in a stoppage in the cash coupon payment of the junior notes. This is in line with Moody's methodology to rate non-cumulative hybrids with a strong mandatory coupon skip trigger. The subordinated perpetual bond has an indefinite maturity. The issuer has a call option, subject to Suedzucker having issued, within the 12 months preceding the redemption becoming effective, parity securities and/or junior securities under terms and conditions similar to those of the junior notes, against issue proceeds at least equal to the amounts payable upon redemption.

The Ba2 subordinated instrument rating reflects the loss absorption characteristics of the rated instrument (which continues to receive Basket D treatment), including (1) its deeply subordinated and perpetual nature; (2) the presence of a mandatory non-cumulative coupon suspension linked to a breach of the strong trigger; and (3) an optional cumulative deferral if no dividends are paid.

NEGATIVE OUTLOOK

The negative outlook reflects Moody's expectation that currently low sugar prices will result in a prolonged deterioration in the company's operating performance and profitability, which will lead to a weakening in key credit metrics beyond levels which Moody's deems appropriate for the Baa2 rating. Failure to restore operating margin or reducing financial leverage towards 4.0x over the next 12 to 18 months through measures aimed at preserving cash could result in a rating downgrade.

WHAT COULD CHANGE THE RATING UP/DOWN

Positive pressure on the rating is currently unlikely given the negative outlook. A restoration of profitability, together with the company's ability to reduce its Moody's adjusted leverage sustainably below 2.5x could lead to upward pressure on the rating.

Conversely, negative rating pressure could develop in case of a prolonged deterioration in both operating margin and credit metrics. Quantitatively a Moody's adjusted debt to EBITDA ratio sustained above 3.5x and a retained cash flow/net debt ratio sustainably below 20% could result in a downgrade. Any deterioration in the company's liquidity profile could also lead to a downgrade.

PRINCIPAL METHODOLOGIES

The principal methodology used in these ratings was Global Protein and Agriculture Industry published in June 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Suedzucker is the leading beet sugar producer in Europe, with an overall reported market share of around 24% in the EU-28. Suedzucker is also active in three other business segments: Special Products, CropEnergies and Fruit. Within the Special Products segment, the divisions are Starch, Freiberger (mainly frozen and refrigerated pizza), the BENEO Group (mostly sugar substitutes and functional carbohydrates made from natural raw materials) and PortionPack Europe. The CropEnergies segment focuses on bioethanol and high-protein animal feed production. In the Fruit segment, the divisions are fruit preparations and fruit juice concentrates. In full year 2018 (ending February 2018), Suedzucker reported sales of around €7.0 billion and operating profit of around €440 million based on preliminary result. The company generates around 80% of its sales in Europe.

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 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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Paolo Leschiutta
Senior Vice President
Corporate Finance Group
Moody's Italia S.r.l
Corso di Porta Romana 68
Milan 20122
Italy
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Yasmina Serghini
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Italia S.r.l
Corso di Porta Romana 68
Milan 20122
Italy
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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