(The following statement was released by the rating agency)
Dec 14 -
-- Switzerland-based Barry Callebaut AG announced on Dec. 12, 2012, that it had signed an agreement to acquire the cocoa ingredients division of Singapore-based Petra Foods Ltd. for US$950 million.
-- We are placing our ‘BBB-’ long-term and senior unsecured debt ratings on Barry Callebaut on CreditWatch negative.
-- The CreditWatch placement reflects our view that, even with the planned equity injection, the acquisition will weaken the Barry Callebaut’s credit metrics.
On Dec. 14, 2012, Standard & Poor’s Ratings Services placed its ‘BBB-’ long-term corporate credit rating on Switzerland-based cocoa producer Barry Callebaut AG on CreditWatch with negative implications. We also placed our ‘BBB-’ issue rating on Barry Callebaut’s senior unsecured debt on CreditWatch negative.
The CreditWatch placement follows Barry Callebaut’s announcement on Dec. 12, 2012, that is had reached an agreement to acquire the cocoa ingredients division of Singapore-based Petra Foods Ltd. for US$950 million.
We understand Barry Callebaut already has a bridge loan covering the transaction, to be replaced through equity and debt issues within 12 months. As the amount of the future equity injection is not yet defined, we cannot yet fully assess the transaction’s impact on Barry Callebaut’s credit metrics. We therefore can’t rule out the possibility of a downgrade of up to two notches if the equity infusion is feeble, although this isn’t our current base-case scenario.
The CreditWatch factors in our view that the $950 million deal, if it closes, will likely weaken Barry Callebaut’s credit metrics to lower than levels we view as commensurate with a ‘BBB-’ rating, specifically Standard & Poor’s adjusted debt to EBITDA below 3.0x and adjusted funds from operations (FFO) to debt of about 30%.
From a business perspective, we believe the acquisition would bring Barry Callebaut strong growth prospects, with sizable additional volumes in emerging markets, especially in Asia and Latin America. The deal would also diversify Barry Callebaut’s cocoa sourcing. However, the consolidation of Petra Foods would at the onset dilute Barry Callebaut’s margins, owing to Petra Foods’ lower profitability and deal’s integration costs.
We aim to resolve the CreditWatch placement once the transaction outcome, terms, and financing structure become available, and when we have assessed the transaction’s impact on Barry Callebaut’s credit metrics. We continue to view adjusted FFO to net debt of about 30% and net debt to EBITDA of below 3.0x as commensurate with the current ‘BBB-’ rating.
A downgrade of at least one notch is highly likely if the transaction materializes. We could consider a downgrade of up to two notches, depending on the magnitude of the equity financing and on the company’s ability to improve credit metrics in the 18 months following the transaction.
Given the acquisition’s size, and considering that Barry Callebaut’s adjusted FFO-to-debt ratio had decreased to 25.5% as of Aug. 31, 2012, an affirmation of the ‘BBB-’ ratings looks remote to us at this stage, even with the potential injection of some equity.
Related Criteria And Research
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Criteria For Rating The Global Branded Nondurable Consumer Products Industry, April 28, 2011
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
Ratings Affirmed; CreditWatch/Outlook Action
Barry Callebaut AG
Barry Callebaut Services N.V.
Corporate Credit Rating BBB-/Watch Neg/-- BBB-/Stable/--
Barry Callebaut Services N.V.
Senior Unsecured* BBB-/Watch Neg BBB-
*Guaranteed by Barry Callebaut AG