Investing.com -- Moody’s Ratings announced a change in the outlook for Barry Callebaut AG, a leading manufacturer of high-quality chocolate and cocoa products, from stable to negative on April 15, 2025. Despite this, the Baa3 long-term issuer rating and the Baa3 backed senior unsecured rating on the notes issued by Barry Callebaut Services N.V. were affirmed.

The revised outlook reflects Moody’s anticipation of prolonged deterioration in Barry Callebaut’s cash generation, making recovery in credit metrics over the next 12 to 18 months more challenging than expected. The company’s cash generation has been affected by several factors, including volume pressure, delays in realizing the full benefits of the company’s BC Next Level cost savings programme, and lower than expected cash generation in the first half of its fiscal year ending August 2025.

Paolo Leschiutta, a Moody’s Ratings Senior Vice President and lead analyst for Barry Callebaut, stated that the company’s profitability and liquidity remain adequate and cocoa industry fundamentals are still positive. However, he also noted that the company’s ability to rapidly recover cash generation over the next 12 to 18 months remains uncertain, and failure to improve credit metrics could result in a rating downgrade.

Barry Callebaut’s working capital requirements have significantly increased due to a sudden and unprecedented rise in cocoa bean prices since early 2024 and a relatively long working capital cycle. Consequently, the company has been financing its substantial investment in working capital through additional debt, causing a significant strain on credit metrics.

Barry Callebaut’s financial leverage, as measured by Moody’s adjusted debt to EBITDA, exceeded 8.0x as of February 2025, which is high for its Baa3 rating. However, Moody’s anticipates improvement in credit metrics over the next 12 to 18 months, even though it will take time before the company’s leverage returns to its historical levels of around 3.5x.

Despite the company’s challenges, there are some positive aspects. Cocoa bean prices have slightly decreased since their peak in 2024, and there are early signs of oversupply in the market, which should support lower prices and alleviate future working capital needs. Additionally, despite negative impacts from one-off factors in the first half, the company’s recurring EBIT and recurring EBIT per ton have grown marginally.

The company’s BC Next Level programme is expected to support credit metrics improvement, but most of the benefits are anticipated to be seen in fiscal 2026, resulting in high leverage for fiscal 2025. The company’s reported profitability over the short term will be suppressed due to the costs to implement the programme.

Despite the significant working capital requirements, the company’s liquidity remains adequate, supported by around CHF1.7 billion of cash available on balance sheet as of the end of February 2025, full availability under its €1.3 billion revolving credit facility maturing in October 2028 and a new €620 million facility maturing in October 2026.

However, the company needs to maintain ample liquidity resources due to the volatility of cocoa bean prices. It normally relies on short-term debt, including its €900 million commercial paper (CP) programme to finance seasonal purchase of inventories. Short-term debt was quite substantial at CHF2.55 billion as of February 2025, which was higher than usual.

The negative outlook reflects Moody’s expectations for prolonged deterioration in the company’s cash generation. A number of factors, including some volume pressure, a delay in seeing the full benefits of cost savings under the company’s BC Next Level cost savings programme, together with lower than we previously anticipated cash generation, will leave the company more vulnerable to further volatility in cocoa bean prices. Failure to show improvement in credit metrics could result in a rating downgrade.

Upward rating pressure is currently limited due to the negative outlook and expected weak credit metrics over the next 12 to 18 months. Negative pressure on the rating could arise if the company’s free cash-flow generation does not improve or Moody’s adjusted EBITDA does not grow towards CHF1,000 million or its adjusted leverage remains well above 3.5x beyond fiscal 2026.

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