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Rating Action:

Moody's upgrades Tereos to Ba2; stable outlook

21 Aug 2012

London, 21 August 2012 -- Moody's Investors Service has today upgraded to Ba2 from Ba3 the corporate family rating (CFR) and probability of default rating (PDR) of Tereos. Concurrently, Moody's has upgraded to Ba3 from B1 the EUR500 million 2014 bond issued at Tereos Europe. In addition, the rating agency has changed the outlook on all ratings to stable from positive.

RATING RATIONALE

"Today's action reflects the continued improvement in Tereos' operating performance, which is notably benefitting from supportive industry conditions in the sugar beet segment. This is leading to credit metrics that we expect to remain solidly positioned in the Ba2 rating category in the medium term," says Andreas Rands, Moody's Vice President -- Senior Analyst and lead analyst for Tereos. "We expect that, at least during the next 12-18 months, the group will continue to benefit from a favourable environment for its sugar beet division based on the current supply constraints in the regulated EU sugar market, which are driving prices higher. In addition, should Tereos' Brazilian crop yields improve, the group would also benefit from the world sugar price remaining at a high, but volatile, level, principally due to sustained emerging market demand and low global sugar stocks."

Tereos' 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 capex, as the company invests to increase production capacity in its international markets, in addition to production flexibility and efficiency improvements in Europe, all of which constrains debt reduction; (3) currently tight covenant headroom at the Tereos EU level; 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' 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 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 cautions that any further deleveraging by Tereos will be driven primarily by increasing EBITDA, and that the group's ability to reduce debt over the next few years will be constrained by its large capex programme to reinforce its position in the Brazilian sugar cane and other markets. Moody's considers that Tereos' expansion in the Brazilian market represents an opportunity for the group to diversify into faster-growing markets than the European Union; however, this diversification brings additional volatility to Tereos' business profile because of the non-regulated nature of the sugar cane market in Brazil. Moreover, during the current fiscal year, yields from Tereos' Brazilian crop have been disappointing, due to bad weather and the lack of industry investment in crops following the 2008-09 global financial crisis. However, in FY 2011 (ended September), Tereos embarked on a major multi-year sugar cane replanting programme, which will help increase the group's total crop output in future fiscal years.

Moody's had previously indicated in its guidance that an upgrade to Ba2 would require the company sustaining a further strengthening in Tereos' operating performance, cash flow generation and credit metrics, and a track record of deleveraging with an adjusted debt/EBITDA ratio comfortably below 3.5x by FY 2012 and beyond on a sustained basis. Results for the nine months to 30 June 2012 confirmed the positive trend in Tereos' financial performance, with the group achieving a reported 9.9% increase in sales and 18.0% increase in reported EBITDA over the previous year, largely due to the performance of Tereos France (the group's key sugar beet processing company). Tereos asserts that almost 100% of its budgeted fiscal year 2011/2012 sugar beet sales are contracted, providing confidence that the group will meet its targets for the year. In Moody's view, on the back of Tereos's performance in the last 12 months to June 2012, and the rating agency's expectation for FY 2012 and beyond, the company will be able to sustain credit metrics previously anticipated for the Ba2 category. However, Moody's notes that Tereos' 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.

From a liquidity perspective, we note that Tereos' Grain segment will return to maintenance levels of capex after FY 2012. This will follow a period in which Tereos has made substantial investments to increase its starch capacity and improve operational flexibility, thereby enabling it to produce a variety of corn-based proteins. In Moody's view, this will be key to improve the currently restricted covenant headroom at Tereos EU (the Grain division holding company), with Tereos forecasting that it will increase this to more comfortable levels during the next fiscal year.

The Ba3 rating of Tereos Europe's EUR500 million worth of notes reflects the overall probability of default rating (PDR) of the company, which is at Ba2, and a loss-given-default assessment of LGD-4. The bonds continue to benefit from a downstream guarantee from Tereos - an entity that accounts for approximately 40% of the EBITDA and 30% of the assets of the consolidated entity - and are secured on a second-ranking pledge over the shares of Tereos' subsidiaries.

The stable outlook reflects Moody's view that Tereos' expected deleveraging and improved cash generation will leave it solidly positioned for the Ba2 rating over the next 12-18 months and that metrics may improve further on the back of supportive industry conditions. Moody's notes that Tereos' 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. Over the coming 12-18 months we expect the company to build on its cash balances and financial flexibility to ensure that Tereos builds a cushion to sustain strong "through the sugar cycle" credit metrics.

WHAT COULD CHANGE THE RATING UP/DOWN

Despite the risks involved with Tereos' expansion, further positive pressure on the rating or the outlook could develop during the next 12-18 months, due to 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 while continuing to deleverage, with a debt/EBITDA ratio (as adjusted by Moody's) comfortably below 3x on a sustained basis; (2) there being increased visibility with regard to the company'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 company 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 in view of today's action, negative rating pressure could develop if (1) Tereos' 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 company'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 rating Tereos and Tereos Europe was the Global Agricultural Cooperatives Industry Methodology 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 alcohol from cereals and a leading Brazilian producer of sugar and ethanol from sugar cane. The company posted last-twelve-months revenues of EUR4.7 billion as at 30 June 2012.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant 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 relevant 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.

The ratings have been disclosed to the rated entities or their designated agent(s) and issued with no amendment resulting from that disclosure.

Information sources used to prepare each of the ratings are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entities, obligations or credits satisfactory for the purposes of issuing these ratings.

Moody's adopts all necessary measures so that the information it uses in assigning the ratings is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entities or their related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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.

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 upgrades Tereos to Ba2; stable outlook
No Related Data.
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