How to buy Bunge? Bond investors say ADM would likely issue equity

By Tom Polansek and Karl Plume

CHICAGO (Reuters) - U.S. grain merchant Archer Daniels Midland Co would need to issue equity to help finance a proposed takeover of rival Bunge Ltd, according to investors and bond analysts, as a years-long slump in agricultural commodity prices makes a debt-only deal too risky.

Issuing equity would dilute the ownership of existing ADM shareholders in what would be the biggest grains industry deal on record. But it would put the company on a stronger financial footing - helping it preserve cheap access to credit to fund its regular operations of buying, processing and selling corn, soybeans and wheat.

 

"Given the importance for capital market access, there would have to be some sort of equity component in this transaction," said Bill Densmore, senior director of corporate ratings at Fitch Ratings.

ADM's proposed acquisition of Bunge came to light last month, although neither side has confirmed that they are in talks. The deal has an estimated price tag above $16 billion and comes as years of bumper harvests keep crop prices low and make it difficult for grains merchants to turn a profit.

That downturn means creditors may keep ADM on a short leash if it did the deal. For example, Fitch would potentially give ADM a shorter window than its usual 18 to 24 months to reduce the ratio of its debt-to-earnings - or leverage - after a deal, something critical to maintaining its A long-term credit rating, Densmore said

"We would have less confidence in those earnings going forward," Densmore said.

Companies can be downgraded if leverage exceeds a certain ratio range for too long.

Like Fitch, S&P Global Ratings has assigned ADM an A long-term rating, indicating a corporate bond that is an attractive investment with a relatively low risk of default. ADM has a comparable long-term A2 rating from Moody's Investors Service, which uses slightly different labels in its scale.

ADM relies on the good ratings for easy and cheap access to credit to buy crops from farmers, make improvements to processing plants and build new grain facilities. Merchants typically pay off short-term borrowings after processing the crops and selling them to users like livestock producers.

Volumes are huge but margins are typically thin, which makes access to cheap capital essential. Last year, ADM processed more than 57 million metric tons of corn and oilseeds and exported millions of tons more.

ADM did not respond to a request for comment. But Chief Financial Officer Ray Young said on a Feb. 6 conference call that maintaining strong ratings is "paramount" to ADM.

He suggested there were other ways of funding a deal than debt. "We've got so many avenues in order to help raise capital," he said.

"They have to do an equity deal," said Sam Halpert, a senior analyst for VanEck's Natural Resources Equity strategy, which owns Bunge shares and previously owned stock in ADM.

CREDIT LINES AND THIN MARGINS

To be sure, concerns about how ADM would finance a deal for Bunge could dissipate if grain supplies tighten and earnings improve.

ADM, which has a market capitalization of about $23.8 billion, would also likely need to sell some of Bunge's assets to win anti-trust approval from regulators due to an overlap of their businesses, particularly in the United States.

Cash from those sales would help pay down some of the debt, said John Rogers, senior vice president at Moody's. Those sales would be material, he added, but could come at a time when they may not fetch the highest prices.

Rogers said the estimated price for Bunge may be too high for ADM.

"It just seems to be an awfully large price to pay given what you might get for some of these assets," Rogers said. "But never say never in this business."

Bunge is rated BBB by Fitch and S&P and Baa2 by Moody's, three notches below ADM's ratings.

Last year, Fitch and Moody's cut their outlooks for Bunge due to weak earnings and after the company issued $1 billion of debt to buy a controlling stake in a Malaysian palm oil company.

Bunge has declined to comment on ADM's approach, which followed a wave of tie-ups among top seed and crop chemical companies, including Dow Chemical and DuPont. Bunge has a market cap of about $10.7 billion.

(Reporting by Tom Polansek and Karl Plume; Editing by Caroline Stauffer and Leslie Adler)