Tereos : Leverage poised to peak temporarily at around 5x by the end of 2025-26

Tereos reported a 29% decline in EBITDA for 2024-25 (FYE 31 March 2025) and a net debt-to-EBITDA ratio that rose to 2.8x at end-March 2025, although these were no surprises compared with expectations. What was less expected, however, was the fact that, while reiterating its medium-term financial targets, the group announced that FY 2025-26 would be a transitional period during which its margins would come under pressure and its leverage would increase to 5x. We were given to understand that this temporary deviation stems from a combination of adverse circumstances. In Europe, sugar and ethanol prices are unlikely to rebound sharply, although this was already the baseline assumption at the outset. But there are also other market trends that will squeeze margins at Tereos's other divisions. At the International division, sugarcane harvests in Brazil and Réunion are expected to be lower, which could lead to reduced sugar and ethanol production and impact margins. We also understand that for starch products, there could be a temporary reduction in margins due to price efforts to regain market share.
Tereos has made considerable efforts in recent years to reduce its debt and strengthen profitability, thereby increasing its resilience. That said, the group remains inherently exposed to price volatility in agricultural markets, which can lead to significant year-on-year fluctuations in profits and temporarily weigh on its credit ratios. This situation is expected to occur this year, with leverage potentially rising from 2.8x as of March 31, 2025, to 5.0x as of March 31, 2026, making it unlikely now that we will see an upgrade of its credit ratings over the next 12 months. In this regard, Fitch has just confirmed its credit rating but lowered its outlook from positive to stable. We expect S&P to follow suit shortly. Still, we do not believe that Tereos deserves to be downgraded from the 'double-B' category, at least as long as this peak in leverage is only temporary and the group remains committed to a process of structural deleveraging while maintaining solid liquidity. Thanks to the renewal of its syndicated credit lines last year and its latest bond issue in January, which enabled it to pre-finance this year's repayments, we believe that Tereos will maintain comfortable liquidity, even in anticipation of cash flow consumption in 2025/26.