RATINGS RATIONALE
"Today's rating action reflects the sustained improvement in Suedzucker's operating performance, particularly in the Sugar segment, and the continuance of its conservative financial policies, enabling credit metrics to further strengthen to levels now strongly positioned for its Baa1 issuer rating" says Andreas Rands, a Moody's Vice President -- Senior Analyst and lead analyst for Suedzucker. "We expect the company to continue benefiting from a favourable pricing environment for its Sugar segment based on the current supply/demand dynamics in the EU sugar market."
The Baa1 rating reflects Suedzucker's scale and leading position in the production of beet sugar in Europe, as well as the diversification of its business, given its Special Products, CropEnergies and Fruit segments (c. 47% of group revenues in FY 2011/12). The rating reflects continued strengthening in operating performance and the favourable outlook for Suedzucker's Sugar segment. However, the rating remains constrained by regulatory uncertainties in the medium- to long-term horizon and Suedzucker's exposure to commodity-price volatility, particularly in its non-sugar segments, which can be subject to large fluctuations in earnings and cash flows.
Whilst the Sugar segment is the key driver of Suedzucker's growth, all of the group's segments, except Fruit, contributed to the improvement in its operating performance in FY 2011/12. The Fruit segment suffered from the challenging economic environment, as well as rising raw material costs, but since then volumes in fruit preparations have recovered, with Suedzucker expecting an improvement in this segment's FY 2012/13 operating profit. Overall, Suedzucker's positive operating performance has led to a further improvement in its key credit metrics during FY 2011/12 such that they are now more strongly positioned in the Baa1 rating category and are expected to remain supported by positive EU sugar market dynamics.
Moody's had previously indicated in its rating guidance that positive pressure on the ratings or outlook would require Suedzucker to strengthen its credit metrics, including adjusted debt/EBITDA to decrease sustainably below 2.25x and adjusted retained cash flow (RCF)/net debt to increase sustainably above 35% (metrics as adjusted by Moody's), on the back of supportive industry conditions. Suedzucker's first-quarter FY 2012/13 results confirmed the continued positive trend in the group's financial performance. Indeed, as a result of the good visibility of its revenues, the group is forecasting operating profit of above EUR800 million for FY 2012/13, up from EUR751 million in FY 2011/12. In FY 2012/13, the group will continue to benefit from relatively high sugar prices and customers locking in volumes early given the constraints on EU sugar supply.
Moody's estimates that Suedzucker's adjusted leverage as of FY2011/12 was 2.1x and RCF/net debt 38.9%, vs. 2.5x and approximately 29.4%, respectively, as of FY 2010/11. In Moody's view, on the back of Suedzucker's performance in FY 2011/12, and the expectation for FY 2012/13 and beyond, the group could sustain these credit metrics over the medium term. However, the rating remains constrained by the uncertainties of the potential reform of EU sugar market regulation, given that key sections expire as of 30 September 2015, as well as its exposure to commodity price fluctuations, particularly in its Specialty Products, CropEnergies and Fruit segments. For FY 2012/13, the group expects to see a decline in the operating profit generated in the CropEnergies segment as rising raw material costs weighs on results, partly offset by revenue growth. The group expects operating profit in Special Products to be in-line with FY 2011/12 and some improvement in Fruit on the back of a recovery in volumes for fruit preparations.
In addition, the rating incorporates the group's healthy liquidity profile as of first quarter FY 2012/13, with a cash balance of EUR342.9 million (EUR384.1 million including short-term securities) and full availability under its EUR600 million five-year syndicated revolving credit facility.
The Ba1 subordinated rating remains three notches lower than Suedzucker's Baa1 issuer rating and continues to reflect the loss absorption characteristics of the rated instrument (that continues to receive Basket D treatment), including (i) its deeply subordinated and perpetual nature, (ii) the presence of a mandatory non-cumulative coupon suspension linked to a breach of a strong trigger (consolidated Cash Flow of the company is less than 5% of the consolidated Sales Revenues) as well as (iii) an optional cumulative deferral if no dividends are paid.
The positive outlook reflects Moody's view that Suedzucker's expected deleveraging and improved cash generation will leave it strongly positioned for the Baa1 rating over the next 12-18 months and that metrics may improve further on the back of supportive industry conditions. The current rating and outlook assume the maintenance of conservative financial policies and 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 Suedzucker builds a cushion to sustain strong "through the sugar cycle" credit metrics.
WHAT COULD CHANGE THE RATING UP/DOWN
In Moody's view, positive pressure on the rating is likely to develop during the next 12-18 months but this is reliant on (1) the company continuing to maintain adjusted leverage sustainably below 2.25x and maintain adjusted RCF/net debt sustainably above 35%; (2) there is 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 Suedzucker can sustain strong "through the sugar cycle" credit metrics.
Conversely, although not expected in the short term in view of the positive outlook, negative rating pressure could develop if the group's profitability weakens, or financial policies relax, resulting in adjusted leverage rising significantly above 3.0x and adjusted RCF/net debt remaining below 25%.
PRINCIPAL METHODOLOGY
The principal methodology used in rating Suedzucker AG and Suedzucker International Finance B.V. was the Global Food -- Protein and Agriculture Industry Methodology published in September 2009. Other factors used in these ratings are described in Revisions to Moody's Hybrid Tool Kit, published in July 2010. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
Based in Mannheim, Germany, Suedzucker AG is Europe's largest sugar producer. It additionally operates in the Special Products, CropEnergies and Fruit segments and posted EUR7.0 billion in revenues for the fiscal year ended February 2012 (FY 2011/2012).
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Andreas Rands Vice President - Senior Analyst Corporate Finance Group Moody'sInvestors Service Ltd. One Canada SquareCanary WharfLondon E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Paloma San Valentin MD - Corporate Finance Corporate Finance Group JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Releasing Office: Moody's Investors Service Ltd. One Canada SquareCanary WharfLondon E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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