Fitch Affirms Ingredion Inc.'s IDR at 'BBB'; Outlook Stable

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed the long-term Issuer Default Rating (IDR) for Ingredion Inc. (Ingredion) at 'BBB'. The rating applies to approximately $1.8 billion in outstanding debt. The Rating Outlook is Stable.

A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

Specialty Focus Driving Growth

The ratings consider Ingredion's earnings stability and significant scale as a global producer of corn-refined, agriculturally based products and ingredients, as well as starches focused on the food, beverage, animal nutrition, paper & corrugating and brewing market segments. During the past several years, Ingredion has increased diversification through its faster growing specialty portfolio that should enable the company to grow longer-term revenues in the low-to-mid single digits. In 2015, specialties constituted approximately 25% of Ingredion's sales, though it varies by region, and have much higher margins at roughly double Ingredion's core business. The company has targeted the expansion of the higher-margin specialty business to approximately 30% of net sales by 2019.

Business Model Supports Operating Income Stability

Fitch views the pass through nature of customer contracts and the expectation for stable commodity pricing tied to abundant supplies of key raw materials (primarily corn) supporting operating income stability with modest positive margin benefits as corn prices remain at historically low levels. Currently, the USDA forecasts corn prices to remain under $3.75/bushel through the 2015/2016 and 2016/2017 crop years. Corn prices in the 2014/215 crop year were $3.70 per bushel. Fitch expects margin expansion over time supported by the company's strong emphasis on specialities growth and ongoing optimization of network costs combined with good core utilization rates and ability to moderate operational challenges in South America (SA).

South American Challenges Continue

The numerous headwinds in SA have been a long-term drag on profitability as Fitch expects operating income of approximately $60 million for 2016 compared to peak earnings of approximately $200 million in the 2011/2012 period. With the relative stabilization in foreign currencies during the first half of 2016, Ingredion has passed through pricing (up 23%) and extracted further costs out of the South American region (announced two Brazilian facilities closures) to offset foreign exchange pressure (down 28%) that has resulted in volume declines of 6% from the slowing demand.

Reliance on earnings from SA has eased materially given that Ingredion generated 10% of its segment operating income in SA in the LTM period, compared to 25% in 2012. The difficult environment in SA is expected to continue for the near term particularly in Argentina where consumer disposable income has been negatively affected by current government policies. Thus Fitch is more cautious of a material recovery to the SA segment in 2017 where Brazil and Argentina generate more than two-thirds of earnings. A lack of recovery and further structural issues in Argentina could result in additional efficiency measures as Ingredion is primarily dependent on lower-margin high fructose corn syrup.

Strong FCF in Near-term, Volatility Possible

Ingredion's cash flow is subject to periodic working capital volatility associated with agricultural cycles, particularly for corn. However, with generally declining to low commodity prices and the shift in the company's business model following the National Starch acquisition toward specialty ingredients that has boosted earnings generation and profitability, the stability in Ingredion's operating and financial profile has improved. Free cash flow (FCF) has averaged approximately $290 million for the past four years compared to approximately $50 million during the preceding five years. Fitch forecasts FCF in 2016 of approximately $300 million and remaining in the $300 million range annually over the forecast horizon. Assumptions include corn prices that remain historically low and relatively stable, roughly $300 million in capital spending and increased dividends.

Balanced Capital Deployment

Ingredion has a long-term focus on rewarding shareholders with a current emphasis on dividend payout, supplemented by opportunistic share repurchases balanced against growth investments in the context of maintaining an investment-grade credit profile. The dividend payout during the past few years has trended modestly above the upper end of Ingredion's 25% to 30% target range. Fitch expects future dividend increases will be aligned with EPS growth with dividend payouts remaining close to Ingredion's targeted range. Bolt-on or tuck-in acquisitions, particularly to expand the company's specialty ingredients portfolio, are a key part of Ingredion's strategy. While the company's preference is for bolt-on acquisitions in the $300 million to $500 million range, acquisitions could be larger. Fitch would expect the financing for material M&A to be sourced based on transaction location that allows for better cash flow flexibility.

Leverage Expected to Approximate 2x Over Long-term

Gross leverage (debt to EBITDA) for the LTM period as of June 30, 2016 was 1.8x, a decrease from the mid 2x range due to growth in EBITDA and reduction in debt following the Penford Corporation and Kerr Concentrates Inc. (Kerr) acquisitions in 2015. The two acquisitions follow Ingredion's operating strategy to focus on higher-value specialty products through gaining expertise in potato starch, non-starch texturizers and biomaterial solutions with the purchase of Penford, and bolstering the specialty products portfolio with natural fruit and vegetable concentrates, purees and essences from Kerr. Both assets address growing consumer preference for clean label ingredients.

Depending on the amount of debt Ingredion refinances ($850 million in maturities) in the coming months, with the expected growth in earnings, the company could delever to below 1.5x in 2017 absent material bolt-on M&A opportunities. However, Fitch views this as transitory since over the longer term the expectation is for leverage to approximate 2x as the company considers various capital allocation alternatives. Ingredion has a priority to invest in the business either organically or through M&A. However, absent material acquisitions during the next 18 months, Fitch believes the company could pursue substantially larger shareholder-based return initiatives. M&A opportunities are somewhat limited given typical family ownership of specialty-focused assets and Ingredion's disciplined approach toward acquisitions.

A large acquisition in excess of $1 billion and/or several smaller acquisitions within Ingredion's targeted range could increase leverage materially beyond 2x. In this event, Fitch expects Ingredion would delever through EBTIDA growth and debt reduction.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for Ingredion include:

--Consolidated revenue of $5.6 billion in 2016 due to flat revenue growth as a result of foreign exchange headwinds pressuring three of Ingredion's operating regions. Positive low-single-digit revenue growth is expected in 2017 and beyond;--Operating income margin in the upper 14% range in 2016 resulting from increased contribution from specialty ingredients, operating efficiencies and cost synergies. Fitch expects operating income to expand in the outer years on a consolidated basis by at least 20 basis points annually;--Consolidated EBITDA and EBITDA margin approximate $1 billion and 18%, respectively in 2016;--Total debt-to-EBITDA of 1.8x in 2016. Leverage in 2017 could trend lower depending on the extent of material M&A bolt-on opportunities;--FCF in 2016 of approximately $300 million and remaining around the $300 million range annually over the forecast horizon. Assumptions include corn prices that remain historically low and relatively stable, roughly $300 million in capital spending and increased dividends;--Modest share repurchases during the next 18 months to offset dilution, as well as small, bolt-on acquisitions. Fitch believes Ingredion should have capacity within its ratings to consider $1 billion plus sized acquisitions.

RATING SENSITIVITIESFuture developments that may, individually or collectively, lead to a positive rating action include:--Positive rating actions are not anticipated in the intermediate term. Over the longer term, a positive rating action would require a public commitment from management to sustain gross leverage of less than 2x while continuing good operating performance from the North American operations, consolidated EBITDA margins in the mid-teens range and average FCF generation in the mid $200 million range or higher.

Future developments that may, individually or collectively, lead to a negative rating action include:

--A large debt-financed acquisition, significant debt-financed share repurchases, or sustained weaker than anticipated operating performance, likely from unexpected softness in the North American segment, leading to leverage sustained in the upper 2x range would result in a one-notch downgrade.

LIQUIDITY

On June 30, 2016, Ingredion had ample liquidity that included $487 million in cash and short-term investments with the majority of cash offshore and availability of $917 million under its $1 billion credit facility expiring Oct. 22, 2017. Given the significant overseas cash generation and relatively higher effective tax rates compared to other global corporates, Ingredion repatriates at least $100 million in a typical year to meet domestic cash requirements that includes interest, capital investment, dividends and share repurchases. Ingredion maintains sufficient cushion under financial covenants in its revolving and 18-month term loan credit facilities that include a maximum net leverage ratio of 3.25x and a minimum interest coverage ratio of 3.5x.

Consistent cash flow generation has been evident over the past several years given the expansion in funds flow from operations (FFO) that excludes volatility related to working capital swings. FFO was $764 million for the LTM period as of June 30, 2016, an increase from the range of $675 million to $700 million during the past four years. Fitch expects FFO to increase moderately and annual FCF to approximate $300 million over the forecast period. FCF for the LTM period was $302 million.

Significant long-term debt maturities over the next three years include $850 million in debt for 2017 with $350 million term loan due Jan 2017, $200 million of 6% senior notes due April 2017, and $300 million of 1.8% unsecured notes maturing in September 2017. Fitch expects a material portion will be refinanced upon maturity. Fitch also expects Ingredion will reach an agreement in the coming months on a new credit facility since the agreement expires in October 2017.

FULL LIST OF RATING ACTIONS

Fitch affirms Ingredion's ratings as follows:

--IDR at 'BBB';--Senior unsecured revolving credit facility at 'BBB';--Senior unsecured notes at 'BBB'.

The Rating Outlook is Stable.

Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below:

--No material adjustments have been made that have not been disclosed in public fillings of this issuer.

Applicable CriteriaCorporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)https://www.fitchratings.com/site/re/869362

Additional DisclosuresDodd-Frank Rating Information Disclosure Formhttps://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1010891Solicitation Statushttps://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1010891Endorsement Policyhttps://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Fitch Ratings
Primary Analyst
William Densmore
Senior Director
+1-312-368-3125
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Carla Norfleet Taylor, CFA
Senior Director
+1-312-368-3195
or
Committee Chairperson
Monica Aggarwal
Managing Director, CFA
+1-212-908-0282
or
Media Relations
Alyssa Castelli, New York, +1 212-908-0540
[email protected]

Source: Fitch Ratings

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