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Understanding IFF’s Debt Position, Debt Servicing, and More

PART:
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Part 3
Understanding IFF’s Debt Position, Debt Servicing, and More PART 3 OF 5

Did Higher Interest Expense Impact IFF’s Interest Coverage Ratio?

IFF’s interest expense

International Flavors and Fragrances’ (IFF) growing debt has resulted in the increase in its interest expenses. IFF’s interest expense grew from ~$41.8 million in 2012 to ~$53.0 million in 2016. However, IFF raised $500 million with a coupon rate of 4.375%, which it used to pay one of its $250.0 million bond maturities carrying a coupon rate of 6.25%. 

The remaining amount was used for repaying its borrowing from its revolving credit facility and repaying its commercial paper.

Did Higher Interest Expense Impact IFF’s Interest Coverage Ratio?

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At the end of 2Q17, IFF’s interest expense was ~$17.6 million. As IFF has repaid debt carrying higher coupon rates, the interest expense going forward is expected to come down.

Interest coverage ratio

The interest coverage ratio indicates how well a company can service its debt. It is determined by dividing the company’s EBIT (earnings before interest and tax) by its interest expense. The higher the multiple, the better it is for the company, as it can easily service its debt. 

At the end of 2Q17, International Flavors and Fragrances’ interest coverage ratio stood at 9.1x. IFF’s interest coverage ratio has seen a gradual decrease from 11.6x in 2012 to its current level. The decline was primarily driven by the increase in interest expense and lower growth in IFF’s EBIT. IFF’s peer Sensient Technologies (SXT) had an interest coverage ratio of 9.4x, which is marginally better than IFF’s interest coverage ratio.

Investors looking for broad-based exposure to International Flavors and Fragrances can invest in the ProShares Ultra Basic Materials ETF (UYM), which holds 1.2% of its portfolio in IFF. The fund also provides exposure to Praxair (PX) and Air Products and Chemicals (APD), which had weights of 3.9% and 3.3%, respectively, on September 27, 2017.

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