Moody’s cuts Bunge outlook to negative after IOI Loders agreement

CHICAGO: Moody’s Investors Service cut its outlook for Bunge Ltd on Wednesday and cautioned that without much improved earnings it could cut the US agribusiness’ credit rating to just a step above junk status.

The agency revised Bunge’s outlook from stable to negative after it opened a US$900mil credit facility to help fund a deal for a controlling stake in Malaysian palm oil producer IOI Loders Croklaan.

Moody’s maintained Bunge’s Baa2 long-term debt rating, but warned that without improved operating performance and cash flow, the company risks a downgrade to Baa3, one notch above junk.

Its long-term ratings for Bunge rivals Archer Daniels Midland Co and Cargill Inc are A2, three steps above Bunge.

Despite stable credit metrics in recent years, two straight quarters of weak results raised concern that debt-funded acquisitions could weaken Bunge’s credit rating, John Rogers, senior vice-president at Moody‘s, said in a release.

Bunge on Tuesday said it struck a deal to buy 70% of IOI Loders Croklaan from parent IOI Corp Bhd for US$946mil to expand its higher-margin food ingredients business. The deal came two months after the company announced sweeping cost cuts to reverse slide in profits and after rebuffing a takeover approach from Glencore earlier this year.

Global grains traders have been seeking ways to diversify and boost earnings amid a global grains glut that has dragged down commodity prices and squeezed operating margins.

Moody’s said its stable rating had been based on the expectation that Bunge’s trailing four-quarter earnings before interest, taxes, depreciation and amortisation, or EBITDA, would be between US$1.6bil and US$1.9bil.

But after a weak first half of 2017, that was likely to fall to US$1.25bilUS$1.45bil, boosting the company’s pro forma debt-to-EBITDA ratio to 3.5x, Moody’s said.

Ratings agencies Fitch and S&P Global said Tuesday that their Bunge ratings remain unchanged after the deal, citing expectations for an earnings turnaround through 2018. S&P said it expects Bunge’s debtto-EBITDA ratio by late 2018 to fall below the 3x, a critical level above which the ratings agency could consider a downgrade.

Fitch anticipates Bunge’s gross leverage, or debt-to-EBITDA, would remain above the mid-3x level this year before moderating into 2018 with an anticipated rebound in earnings.

Bunge shares were up 1.2% on Wednesday at US$72.29 after tumbling 5.7% a day earlier in the company’s steepest slide in four months.