Bunge Limited's (NYSE: BG ) subsidiary Bunge Finance Europe entered into a $1.75 billion revolving credit facility with ABN AMRO Bank last month. This replaced its two existing revolving facility agreements, a three-year facility worth $650 million and a 17-month facility worth $600 million.
New York-based Bunge is one of the largest agribusiness companies in the U.S., with a market cap of $10.9 billion. Bunge needs to constantly buy agricultural inputs to produce its output; as a result, the company needs a regular flow of money to finance its operations. This is totally normal. Entering into this revolving credit facility will ensure that it will have an even flow of working capital and continue to run its operations smoothly and pay off its long-term debts. But, like all things, there is a point where too much capital (and specifically too much debt) becomes a very bad thing. The question is: Has Bunge reached that point?
Fundamentals
Financially speaking, Bunge, after a brief slump in its performance in 2009, was able to recover well in 2010. Its year-over-year revenue rose by 9% in 2010 while its gross profit margin was 5.7% in 2010, compared to 2.9% the year before. These figures are in line with the comparable Archer-Daniels-Midland (NYSE: ADM ) , which has a larger market cap of $23.6 billion. ADM grew 10.2% over the previous year and its gross profit margins were around 5.6%. ConAgra Foods (NYSE: CAG ) has a market cap of $9.9 billion, which is similar to Bunge's. Its growth rate fell by 2.8% over the previous year, but in comparison to Bunge, it had a much higher gross profit margin of 25.5%. So what we're looking at here is a fairly low-growth industry in which Bunge is performing well.
Bunge's performance seems pretty promising. Its EBITDA grew nearly 342.39% compared to the previous year. Its long-term debt-equity ratio fell to 20.3% from 34.9% in 2009 and its EBITDA was 5.1 times its interest expense. That means that it has been paying off its debts and is also reasonably well placed to pay off future debts. This indicates to me that Bunge can afford to layer on the debt a bit more.
However, its working capital management hasn't been that great. Its average days payable outstanding has decreased to 28.1 days from 34 days, whereas its average days inventory out has gone up from 47.1 days to 48.7 days. Its cash conversion cycle has increased to 41.6 days from 33.7 days as well. This means that money is going out faster than it's coming in. This is where the credit facility possibly fits in, at least to pay off its short-term liabilities. But that's only going to temporarily solve the issue and could create a long-term dependency on credit financing to facilitate the business -- something we don't really like at the Fool.
The Foolish bottom line
Bunge should look to improve its working capital efficiency and reduce its cash conversion cycles. If it does so, there's certainly no issue with its adventure into more significant usages of debt.
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