IFF’s Higher Debt Might Concern Investors

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:

• $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.

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.