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IFF’s Higher Debt Might Concern Investors

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Aug. 18 2020, Updated 5:15 a.m. ET

International Flavors and Fragrances’ debt

At the end of the second quarter, International Flavors and Fragrances (IFF) reported a debt of $1.72 billion. The company’s debt has grown at a compound annual growth rate of 14.60%. The debt includes short-term debt including the current portion of its long-term debt and its long-term debt.

However, International Flavors and Fragrances’ debt position will likely see a massive change. The debt is set to more than double. International Flavors and Fragrances will be raising more than $2.6 billion in debt. As a result, the company’s debt could reach $4.40 billion. Below are the details of the new debt:

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  • $300 million senior notes carrying a coupon rate of 3.4% due in 2020
  • $400 million senior notes bearing a coupon rate of 4.45% due in 2028
  • $800 million senior notes carrying a coupon rate of 5.0% due in 2048
  • 300 million euro senior notes carrying a coupon rate of 0.5% due in 2021
  • 800 million euro senior notes bearing a coupon rate of 1.8% due in 2026

The proceeds from these notes will be used to partially fund the acquisition of Frutarom Industries. As a result of the increased debt, International Flavors and Fragrances’ interest expense will likely increase and impact the net income. The increase will likely have a negative impact on the company’s DE (debt-to-equity) ratio. However, Frutarom will also contribute to International Flavors and Fragrances’ net income after the acquisition is completed.

International Flavors and Fragrances’ DE ratio

The DE ratio is an indication of how much debt a company uses to grow its assets. A higher DE ratio indicates that a company has used extensive borrowing to finance its growth.

At the end of the second quarter, International Flavors and Fragrances’ DE ratio was ~1.0x. Sensient Technologies (SXT) had a DE ratio of 0.89x. International Flavors and Fragrances’ DE ratio is more or less at par with the industry. In the upcoming quarters, the DE ratio is expected to be ~2.6x.

Next, we’ll discuss International Flavors and Fragrances’ impact on the interest expense and its ability to service the debt.

Investors could hold International Flavors and Fragrances indirectly by investing in the Invesco S&P 500® Equal Weight Materials ETF (RTM). RTM has invested 4.2% of its portfolio in International Flavors and Fragrances. The fund also provides exposure to Praxair (PX) and FMC (FMC) with weights of 4.3% and 4.3%, respectively.

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