Even The Analysts upgraded Bunge (BG) because Bunge raised guidance for FY08 above consensus and recently Bunge also acquires Tate & Lyle PLC. But you should consider fleeing away from the shares. The reason is Bunge has no cash and accordingly, it used its shares as currency to buy Corn Products (CPO). Each share of Corn Products common stock will be exchanged for 0.4207 of a Bunge common share, and if this average closing price is equal to or less than $108.90, each share of Corn Products common stock will be exchanged for 0.5142 of a Bunge common share.
Unfortunately, Bunge also absorbs approximately $414 million of CPO’s net debt. It potentially will make Bunge’s Cash to be worse.
I summarize a Roddy Boyd’s Article from Fortune to answer why Bunge’cash flow is in delinquency. Here is:
Even though Bunge generated $1.15 billion last year in an accounting category it created called "funds from operations”. That category doesn't count the hedges. When you include the hedges and calculate cash flow from operations, the result drops by $1.5 billion and results in negative -$411 million in cash flow. It’s even worse than its minus -$289 million the year before.
Bunge has given fertilizers loan to Mato Grosso’s farmers in Brazil and they obligated that the harvest of Soybean would be delivered to pay their debt.
Because the farmers are paying the company in soybeans - which amounted to a bet on rising soybean prices - Bunge hedged its exposure by selling short soybean futures. That's a standard practice for commodities producers. In normal markets, the strategy works, providing Bunge with protection should the price of soybeans decline.
But with soybean futures shooting up nearly 75% at various points last year, Bunge's hedges have absorbed even more of its precious cash. (As the contracts increase in price, the company is hit with margin calls requiring it to put up more cash to keep the contract open in the hopes prices will drop later.)
That negative-$411 million in cash flow doesn't even include the unpaid debts from farmers, which Bunge has yet to take charges for. Should Bunge write down its troubled uncollectible accounts receivable by, say, $500 million, that could wipe out almost half of next year's projected earnings.
Many of the farmers in Mato Grosso are desperately poor. And with fertilizer prices rising even faster than those for soybeans, a large number aren't keeping up with their obligations to Bunge. So even though revenue at the fertilizer unit jumped 51% to more than $3.9 billion in 2007, some $211 million of the unit's trade accounts receivable - nearly a quarter of the total - are classified as doubtful, meaning the company recognizes it isn't certain to get its money back.
Bunge CFO Fouse says the company is pursuing the delinquent farmers. But recoveries may be limited by the vagaries of the Brazilian legal system. Evicting a defaulting farmer who has pledged land to Bunge may take five to eight years, according to lawyers.
As a result, Bunge has had to borrow more and more. The company added $1.6 billion in debt during 2007, nearly doubling interest expense to $436 million. Today, what Bunge calls "total financial debt" (total debt minus cash and equivalents) stands at $4.2 billion.
In short, Bunge has become reliant on its revolving credit facilities and access to the capital markets to fund its operations. And as we all know, that's not a happy place to be of late. Bunge learned that firsthand in March, when it pulled a $500 million bond offering, citing "market conditions." Bunge CFO Jacqualyn Fouse says the bonds could have been sold, but at an interest rate the company was unwilling to pay. (That, of course, is precisely the sort of problem that arises when you need to raise cash in a tight market.)
Related Articles :Bunge (BG) is still Expected to Continue LowerI Won on Bunge (BG)Long MDR Short FSLR, BIDU, BG
Please Note!
This is generally never true. Before buying or selling any asset you should do your own research and reach your own conclusion. See my Disclaimer on the bottom for more information.
You are welcome to republish this article, or any portion thereof.
Please, cite the actual/original source. I would be grateful if you could link back.
