Fitch affirms BBB rating for Bunge's IDR; outlook negative amid company's earnings volatility, lack of earnings visibility

Andrew Rogers

CHICAGO , May 30, 2012 (press release) –
Fitch Ratings has affirmed the ratings for Bunge Limited (Bunge) and its financing subsidiaries, which carry full guarantees from Bunge, as follows:

Bunge Limited

--Long-term Issuer Default Rating (IDR) at 'BBB';

--Preference shares at 'BB+'.

Bunge Limited Finance Corp. (BLFC)

--Long-term IDR at 'BBB';

--Senior unsecured notes at 'BBB';

--Senior unsecured term loans at 'BBB';

--Senior unsecured credit facilities at 'BBB'.

Bunge Finance Europe B.V. (BFE)

--Long-term IDR at 'BBB';

--Senior unsecured credit facilities at 'BBB'.

Bunge N.A. Finance L.P. (BNAF)

--Long-term IDR at 'BBB';

--Senior unsecured notes at 'BBB'.

The Rating Outlook is Negative.

Rating Drivers: Bunge Limited's (Bunge) ratings are supported by the company's position as the world's leading oilseed processor and by modest diversification from its food and ingredients business. Bunge's largest segment, Agribusiness, is also its most stable on an annual basis, generating $1 billion or more of EBITDA in each of the past five years. A long-term favorable agribusiness outlook, driven by growing protein consumption in developing countries and higher demand for biofuels, is also a key rating factor. Fitch expects ample liquidity to support Bunge's ratings through periodic earnings volatility and heightened working capital usage that are characteristic of agricultural commodity cycles. Bunge's borrowings increase during periods of rising commodity prices to finance working capital.

Negative Outlook: While Bunge's operating performance improved significantly in 2011, Fitch is retaining the Negative Outlook in order to ascertain the sustainability of the performance improvement trend. Fitch remains cautious, given Bunge's earnings volatility and lack of earnings visibility. The company's high capital expenditures in relation to its cash generation also remain a concern as Bunge has not been able to consistently generate positive free cash flow (FCF, cash flow from operations less capital expenditures and dividends), even excluding working capital swings.

The $1.4 billion Moema sugar mills acquisition in Brazil in 2010 was expected to provide diversification after the divestiture of the company's Brazilian fertilizer nutrients business, but so far has trailed expectations with disappointing performance. Sugar & Bioenergy and the remaining retail fertilizer business have yet to materially contribute to Bunge's earnings, although improvement is anticipated in 2012.

Guidelines for Further Rating Actions:

Fitch could revise the Outlook to Stable if Bunge's earnings show stability and/or growth on an annual basis in 2012 versus 2011 and unadjusted leverage (total debt to EBITDA) in the mid-2x to 3x range appears achievable during most years. The first quarter, which is seasonally slow, had weaker operating performance than Fitch had anticipated. However, the large North American crops expected in the fall of 2012 and increased sugarcane milling volumes in Brazil should lead to strong second half earnings in 2012. If Bunge can demonstrate that its sugar business is on track to generate EBIT of more than $100 million in 2012, this would also support a Stable Outlook. That level of earnings would be a significant improvement from the negative $20 million Sugar & Bioenergy segment EBIT in 2011, and demonstrates progress toward the generation of annual segment EBIT greater than $150 million in future years.

Fitch could implement a negative rating action if Bunge's EBITDA generation of $1.7 billion in 2011 proves to be unsustainable, or if the company engages in a large, debt-financed acquisition, leading to a material increase in unadjusted leverage. The ratings could also be pressured if FFO is insufficient to cover Bunge's capital expenditures and dividends and results in material incremental borrowing. Any negative rating action is likely to be limited to a one notch downgrade.

Cash Flow and Liquidity: In 2011, Bunge's FCF was $1.3 billion, a significant improvement from a $3.7 billion deficit in 2010 which was driven by working capital needs due to escalating agricultural commodity prices and inventories. For the first quarter ending March 31, 2012, FCF swung negative again, to a deficit of $581 million, due to working capital usage. Although Fitch believes high agricultural commodity prices are likely to remain, driven by solid long-term global demand, working capital could become a source of funds if commodity prices experience even a moderate pullback. Correspondingly, if commodity prices stabilize at heightened levels, working capital usage should flatten out.

Bunge has $3.4 billion of committed liquidity including a $600 million fully backstopped liquidity facility for its commercial paper (CP) program, a $1.75 billion revolving credit facility due in April 2014 and a $1.0 billion revolving credit facility expiring in Nov. 2016. As of March 31, 2012, the company did not have any CP outstanding and it had a total of $2.1 billion available under its committed facilities. The credit facilities contain certain financial covenants. Bunge is in compliance with its financial covenants.

Adjustments for Liquid Inventories: Bunge's liquidity includes its agricultural commodity inventories such as soybeans, soybean oil, soybean meal, corn, wheat, sugar, etc., classified as readily marketable inventories (RMI). Commodities that fall into the RMI classification, which are very liquid due to widely available markets and international pricing mechanisms and generally hedged, provide an important source of liquidity for agribusiness companies. RMI was $4.2 billion at March 31, 2012, factoring Fitch's 10% discretionary 'haircut' to Bunge's reported RMI. In addition to evaluating traditional credit measures, Fitch's analysis of agribusiness companies considers leverage ratios that exclude debt used to finance RMI. Interest expense on debt used to finance RMI is reclassified as 'cost of goods sold' and thus is excluded from interest expense. Fitch utilizes significant discretion in these calculations. With the adjustments described above, Bunge's total debt/operating EBITDA was 1.0x for the latest 12 months ended March 31, 2012.

Unadjusted total debt (with 50% equity credit for the $690 million convertible preference shares) to operating EBITDA was 3.5x, operating EBITDA to gross interest expense was 5.1x and FFO fixed charge coverage was 3.5x for the same period. Unadjusted leverage is high for the rating level but should improve with stronger second half 2012 earnings. Total debt with equity credit increased $1.2 billion to $5.6 billion at March 31, 2012 from Dec. 31, 2011, primarily due to higher working capital.

Upcoming Maturities: Bunge's debt maturities include $300 million of senior unsecured notes due in May 2013 and a $300 million term loan due in Dec. 2013. Beyond these maturities, Bunge also has $570 million of debt coming due in 2014.

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