Fitch said Bunge experienced price and margin volatility within its South American agribusiness segment during the first half of 2016, reflecting the negative effects from weather and the weakening of the U.S. dollar against key grain growing region currencies. Meanwhile, near-term margins have been pressured in South America due to higher-than-anticipated farmer retention of soybeans, Fitch said.
Fitch said it expects Bunge’s overall operating income growth for 2016 to be “flat to slightly positive” in 2016. The ratings agency said it expects dislocation opportunities to present themselves in the back half of 2016 and into 2017 related to expected South American crop reductions that should benefit U.S. and Black Sea exports and North American crush margins that have been weak. Additionally, the softseed crushing environment is expected to improve from lower 2015 levels reflecting the expected large harvests, Fitch said. The remaining Food & Ingredients, Fertilizer and Sugar & Bioenergy segments are all expected to demonstrate modest to moderate earnings growth from 2015 levels.
“Consequently, Fitch believes that the company will maintain EBITDA in the range of $1.8 billion over the intermediate term,” Fitch said. “The long-term outlook for the agriculture industry is favorable given higher consumption of protein in developing countries and increasing demand for biofuels.”
Share repurchases have ramped up the past two years to $300 million annually compared to none in 2012 and 2013, and Bunge repurchased $200 million in shares during the first half of 2016. With the increase in leverage, Fitch said it expects Bunge will moderate share repurchase activity going forward.
“Dividends that have increased in the low double-digits annually are expected to rise, tracking expected growth in earnings,” Fitch said.
Bunge’s internal sources of liquidity include $548 million of cash and cash equivalents, $215 million of marketable securities and short-term investments and FCF that may fluctuate from positive to negative from year to year, Fitch said. The ratings agency noted that Bunge generated a deficit of $722 million during the LTM period due primarily to the working capital increase in RMI attributable to merchandising activities that increased by $1.4 billion in the first six months of 2016. Fitch said it expects FCF turning moderately negative in 2016 due to increased working capital requirements.
“A key credit concern of commodity processors is access to sufficient liquidity given historically volatile working capital needs,” Fitch said. “Bunge has abundant sources of external liquidity provided by various credit facilities available to fund its operations globally, with approximately $5 billion in capacity under its revolving bank agreements and commercial paper program, of which $3.4 billion was available at the end of the second quarter of 2016. In addition to the committed credit facilities, Bunge through its financing subsidiaries will from time-to-time enter into bilateral short-term credit lines as necessary. As of June 30, 2016, there was $300 million outstanding.”
