Danone on Friday claimed its financial position was “sound” after credit rating agency Moody’s said a slowdown in the French food group’s cash flow could lengthen the amount of time it takes to repay its debt.
Moody’s changed its outlook on Danone’s A3 senior unsecured debt rating to “negative” from “stable” on Friday as it warned that weakening consumer sentiment in Europe and slowing emerging markets sales could hurt the group’s financial performance.
Danone is one of the most highly leveraged companies in the food industry, carrying net debt of about four times earnings.
Moody’s stable rating was conditional on Danone reducing its net debt ratio to around 2.5 times earnings by the end of next year.
On Friday, the agency said it now believed it would be difficult for Danone to hit this target. “Due to the currently challenging operating environment and economic slowdown, significant improvements in cash-flow generation may be challenging over the short term,” Marika Makela, Moody’s analyst, said.
Danone said it was “solidly on track” to achieve the debt-reduction programme outlined to Moody’s. Its shares closed up 6.3 per cent at €43.91 in Paris as the CAC 40 Index rose 2.4 per cent.
Moody’s also said it was worried that Danone’s liquidity was “constrained” by €2.7bn ($3.44bn) of put options given to minority shareholders in the company’s subsidiaries, because €2.5bn of these can be exercised within a year.
The agency said that, while Danone could cope with all the puts being exercised simultaneously, maintaining sufficient liquidity would depend on the group renewing its credit facilities.
Danone said it had enough financing to back up its €1.9bn of commercial paper borrowing and to cover its outstanding put options, including €3.8bn of committed credit lines, €0.6bn of cash and €0.5bn of Treasury shares.
The move by Moody’s came after Danone cut its 2009 sales targets on Thursday, warning of a slowdown in some core emerging markets, including Brazil and Russia.
Investment bank JP Morgan cut its price targets for Danone on Friday, noting that the French food group was more exposed than some of its peers.
The bank said some people could no longer afford the company’s yoghurts as retail prices increased, and that yoghurts were a more discretionary purchase for consumers than other products, such as pet food.
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