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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.
"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.
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.
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.
(Partly Sourced: Moodys)
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