Suedzucker International Finance B.V. — Moody’s changes outlook on Suedzucker’s Baa3 rating to stable from negative
Rating Action: Moody’s changes outlook on Suedzucker’s Baa3 rating to stable from negativeGlobal Credit Research – 17 Jan 2022Rating on junior subordinated notes upgraded to B1 from B2Milan, January 17, 2022 — Moody’s Investors Service, (« Moody’s ») has today changed to stable from negative the outlook on the ratings of Suedzucker AG (‘Suedzucker’ or ‘the company’) and Suedzucker International Finance B.V. Concurrently, Moody’s has affirmed the Baa3 long-term issuer rating and the Prime-3 (P-3) commercial paper rating of Suedzucker and Suedzucker International Finance B.V., and upgraded to B1 from B2 the rating on the guaranteed junior subordinated notes (or ‘the hybrid’) issued by Suedzucker International Finance B.V. »The outlook change to stable from negative reflects the improvement in the company’s underlying profitability, cash generation and credit metrics since 2019, as well our expectation that these improvements will continue over the next 12 to 18 months supported by favourable dynamics in the European sugar markets, » said Paolo Leschiutta, a Moody’s Senior Vice President and lead analyst for Suedzucker. »The upgrade of the rating on the hybrid notes reflects our expectations that a breach of the cash test covenant (consolidated Cash Flow less than 5 % of consolidated revenues) is today less likely given Suedzucker’s improved cash flow generation, » added Mr. Leschiutta.A full list of affected ratings is provided at the end of this press release.RATINGS RATIONALE– RATIONALE FOR OUTLOOK CHANGE TO STABLE FROM NEGATIVEThe affirmation of Suedzucker’s Baa3 rating and the change of outlook to stable from negative reflect the improvement of the company’s underlying profitability and cash generation since 2019 which, together with positive supply/demand dynamics in the European sugar market, should support further improvement in credit metrics over the next 12 to 18 months.Although the company’s profitability is likely to remain volatile because it largely depends on the levels of contracted sugar and ethanol prices, Moody’s believes that the recent rationalisation in the European sugar market, together with the company’s effort in reducing and optimising its production capacity and its reduced reliance on long term contracts, which have made its cost structure more flexible, will allow it to mitigate the potential volatility in prices resulting in more stable credit metrics.Disruptions caused by the coronavirus pandemic led to weaker operating performance in fiscal year ending February 2021 (fiscal 2021) than Moody’s had anticipated. However, Suedzucker’s profitability and cash generation progressively recovered during fiscal 2022. In the nine months to November 2021, its revenues and EBITDA grew by 10.8% and 13.7%, respectively. In the same period, the sugar division reported an EBITDA of E94 million, a material improvement compared with the E23 million reported in the same period last year.Sugar prices across Europe have remained high during the recent sugar campaign helping the company in negotiating better prices with its customers. Although the company did not fully benefit from the strong recovery in sugar prices in recent months, the most recently closed contracts provide good indication of the possible price level for the second half of fiscal 2022 and part of fiscal 2023.High sugar prices were supported by expectations of shortages of sugar production globally, largely due to lower production in Brazil, high oil prices driving higher logistics costs and higher demand for ethanol, as well as the EU remaining a net importer of sugar.Although the general high inflation seen on several food commodities should also support sustained high sugar prices in Europe over the next year, as acreage might be diverted from sugar beet to other food crops, reducing the overall sugar supply, visibility over the long-term development of sugar prices and the ability of the company to sustain high profitability on an ongoing basis in its Sugar segment remains modest.Moody’s positively notes the relatively good performance of the company’s non-sugar division, which generated E425 million of EBITDA over the nine months to November 2021. Although this was slightly below prior year, the non-sugar segments benefitted from record high ethanol prices, but suffered from higher input costs, including wheat, energy and packaging.Ethanol demand across Europe is likely to remain robust and additional capacity will remain limited, but current high prices might not be sustainable over the long run, potentially resulting in lower profitability at the CropEnergy division.Moody’s expects the company’s gross financial leverage, measured as Moody’s adjusted gross debt to EBITDA, to reduce to below 4.0x by fiscal 2022 and to remain below that level over the following 18 to 24 months. In addition, Moody’s also expects the company to maintain an EBITA interest cover ratio in the high single digit and a retained cash flow to net debt ratio above 20%. These ratios are in line with the expectations for the Baa3 rating.Suedzucker’s Baa3 rating continues to be supported by the company’s scale and leading position in beet sugar production in Europe; the diversification into five business segments, with increasing contribution from non-sugar activities to the company’s cash generation; and its good liquidity. Moody’s also expects positive free cash flow generation to continue and to support further debt reduction, strengthening the company’s balance sheet. Lower leverage, together with a more flexible cost structure should allow the company to better absorb future volatility in the profitability of the Sugar and CropEnergy segments.– RATIONALE FOR UPGRADE OF JUNIOR SUBORDINATED NOTES TO B1 FROM B2The upgrade to B1 from B2 of the rating on the guaranteed junior subordinated notes (or the hybrid) reflects Moody’s expectations that improved cash flow generation will lead to improved headroom under the instrument’s cash covenant test and therefore lower likelihood that the covenant might be breached. A potential breach of the covenant (or a cash flow event under the company’s definition) stated in the annual report of guarantor Suedzucker, could result in a cancellation of the four quarterly coupon payments on the hybrid following the publication of the report. Moody’s views such an event, which would cause an impairment for investors, less likely today. Following this upgrade, the instrument rating is now four notches below the Baa3 issuer rating.Please also refer to Moody’s Cross-Sector Rating Methodology « Hybrid Equity Credit » published in September 2018 for further details.LIQUIDITYSuedzucker’s liquidity is good, supported by cash and short-term securities of E458 million as of November 2021 and a fully undrawn E600 million five-year syndicated revolving credit facility maturing in July 2026. The facility has no material adverse change clauses or financial covenants. In addition, the company has E400 million of fully available syndicated credit lines signed by its subsidiary Agrana, E250 million maturing in December 2023 with a two-year term-out option and E150 million in August 2022 also with a two-year term-out option, which contain financial covenants but with good headroom.In Moody’s view, the company currently has sufficient available liquidity and (re)financing options to cover the expected cash needs over the next 12-18 months, which includes significant seasonality in working capital requirements, a E300 million bond maturing in November 2023, and utilization under its E600 million commercial paper programme (E40 million outstanding as of November 2021). Debt generally peaks in January as inventories are relatively high and when most beet payments have been made till beginning of the calendar year, and end of June after the final payments to beet farmers, when it could be higher by a maximum of around E200 million-E300 million than compared to the levels of October/November at the beginning of beet processing. The group tends to have cash and liquid investments on the balance sheet as of the end of the year, ahead of final payments to growers. Suedzucker typically finances its peak debt with increased issuance under the commercial paper programme or short-term bilateral credit lines, which are generally rolled over. Its short-term debt maturities are otherwise modest.RATIONALE FOR STABLE OUTLOOKThe stable outlook on the rating reflects Moody’s expectation that Suedzucker will further improve its key credit metrics over the next 12 to 18 months, demonstrating its ability to generate positive FCF and maintain adequate flexibility to better absorb volatility in the profitability of the Sugar segment.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSUpward rating pressure is currently unlikely, given the track record of volatility in terms of operating performance. Over time, a significant improvement in profitability, together with the company’s ability to demonstrate greater earnings stability or a higher contribution from non-sugar activities, could lead to upward pressure on the rating. A rating upgrade is possible if the company succeeds in achieving and maintaining Moody’s-adjusted leverage towards 3.0x on a sustained basis and sustained positive free cash flow.Conversely, downward rating pressure could develop if the company fails to further improve its operating margin and credit metrics. Quantitatively, Moody’s-adjusted debt/EBITDA sustained above 4.0x and retained cash flow/net debt sustainably below 15% could result in a downgrade. Any deterioration in the company’s liquidity could also lead to a downgrade.If Suedzucker’s issuer rating is downgraded to below investment grade, the company’s hybrid instrument would lose the equity credit (currently 75%) that Moody’s assigns to the instrument for debt ratio computation, resulting in a negative impact on the company’s Moody’s-adjusted financial leverage calculation. LIST OF AFFECTED RATINGS Affirmations: ..Issuer: Suedzucker AG …. Commercial Paper, Affirmed P-3…. LT Issuer Rating, Affirmed Baa3..Issuer: Suedzucker International Finance B.V…..BACKED LT Issuer Rating, Affirmed Baa3….Commercial Paper, Affirmed P-3Upgrades:..Issuer: Suedzucker International Finance B.V…..BACKED Junior Subordinated Regular Bond/Debenture, Upgraded to B1 from B2 Outlook Actions: ..Issuer: Suedzucker AG ….Outlook, Changed To Stable From Negative..Issuer: Suedzucker International Finance B.V…..Outlook, Changed To Stable From NegativePRINCIPAL METHODOLOGYThe principal methodology used in these ratings was Protein and Agriculture published in November 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1296919. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.COMPANY PROFILEHeadquartered in Mannheim (Germany), Suedzucker is the leading beet sugar producer in Europe with an overall reported market share of around 24% in the EU-27. Suedzucker is also active in four other business segments: Special Products, CropEnergies, Starch and Fruit. In fiscal 2021, Suedzucker reported sales of around E6.7 billion and EBITDA of E597 million. The company generates around 75% of its sales across the EU, 23% of which in Germany. Over the nine months to November 2021, revenue and EBITDA stood respectively at E5.6 billion and E519 million.REGULATORY DISCLOSURESFor further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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