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Bunge going with bonds to finance purchase of soybeans

(Thursday, April 8, 2004 -- CropChoice news) -- Dow Jones, 04/07/04: NEW YORK -- Bunge Finance, a unit of agricultural giant Bunge Ltd., is seeking to sell a $500 million bond offering Wednesday to finance purchases of soybeans, which have skyrocketed in price by 70% over the last year.

The company, which processes soybeans and other agricultural commodities, will use the proceeds of the 10-year offering to cover higher soybean carrying costs.

The price of soybeans hit $10.64 per bushel on Friday, substantially above historical norms of $5 to $6, and the highest level since July 1988. The price increase is due to surging demand, notably from China, as well as a smaller 2003 crop in the U.S., Argentina and Brazil.

"Although (Bunge Finance's) working capital needs are expected to remain high in the near-term due to soybean inventory costs, Fitch views the increase in debt to finance readily marketable hedged commodity inventory as a temporary situation that will reverse itself when soybean prices trend down toward more historical levels," Fitch said in a report released Wednesday.

The offering, which is being led by Citigroup Global Markets, J.P. Morgan Securities and Morgan Stanley, is rated Baa3 by Moody's Investors Service and triple-B by Standard & Poor's and Fitch Ratings.

The offering was increased from an initial $400 million.

Soybeans -- an essential ingredient in thousands of products as varied as cooking oil and pet food -- have fallen in short supply in the U.S. after dry weather unexpectedly shaved off 15% of the U.S. soybean harvest in 2003, making it the smallest haul in seven years.

Rising commodity prices haven't deterred interest in the Bunge deal.

"If there's one component of the deal that would be a concern, it's the use of term debt to finance short-term commodity prices," said Kevin Murphy, portfolio manager at Putnam Investments in Boston who holds Bunge debt and is considering participating in Wednesday's offering.

But given Bunge's strong market position and the attractiveness of long- term financing rates, Murphy said the longer maturity isn't a worry.

"It's a wonderful environment for financing," Murphy added. "If a company has a cash need they should be thinking about accessing the market now."

In addition to using the proceeds to cover the cost of rising soybean prices, the company plans to refinance short-term debt, Fitch said in its report.

However, some analysts say processors such as Bunge could face long-term pressures if the rise in soybean prices proves more durable.

As soybean prices climbed to their highest levels in 16 years, Bunge and other processors haven't been able to fully pass the costs onto their customers, said Seneri Paludo, market analyst for consultancy firm Agencia Rural, in Curitiba, Brazil.

"The world soybean crop this year turned out very bad, much below expectations, and it caught everyone by surprise," said Paludo.

"Processors are facing higher commodity prices, and in the case of Bunge, which buys the beans to make oil and meal, many times it isn't managing to pass it onto the final products," he said.

But the strong demand from Asia, especially from China, is countering the processor's margin pressure as buyers remain fierce.

The Bunge deal, which is expected to price at a risk premium, or yield margin, over Treasuries of around 1.20 percentage points, is being sold only to qualified investors under the Securities and Exchange Commission's Rule 144a market.

Because the deal is not registered, neither the bankers nor the company can comment publicly on the transaction.

Bunge, which had $3.4 billion in debt outstanding at the end of last year, is the world's leading oilseed processing company and the largest producer and supplier of fertilizers to farmers in South America.