TEXT-S&P revises Chiquita Brands outlook to negative

Fri May 18, 2012 12:07pm EDT

Overview	
     -- U.S.-based Chiquita Brands International Inc.'s  
lower-than-expected first-quarter 2012 operating results reflect a combination
of factors, 	
including lower banana prices, lower salad sales volumes, and higher fuel 	
costs.	
     -- We believe there is the potential for weaker operating performance to 	
continue through 2012, which could pressure Chiquita's cushion on its 	
financial covenants.	
     -- We are revising our rating outlook to negative from stable, and 	
affirming our 'B' corporate credit rating. 	
     -- The negative outlook reflects our estimate that covenant cushion may 	
tighten further, given our expectations for potential weakened near-term 	
operating performance. 	
	
Rating Action	
On May 18, 2012, Standard & Poor's Ratings Services revised its rating outlook 	
on Cincinnati, Ohio-based Chiquita Brands International Inc. (Chiquita) to 	
negative from stable and affirmed its 'B' corporate credit rating on the 	
company. At the same time, we affirmed our 'BB-' senior secured rating and 	
'B-' senior unsecured rating for Chiquita; the corresponding recovery ratings 	
remain unchanged at '1' and '5', respectively. At March 31, 2012, Chiquita had 	
approximately $571 million of total debt outstanding.	
	
Rationale	
The ratings on Chiquita reflect our view that the company's financial risk 	
profile is "highly leveraged" and business risk profile is "weak". Key credit 	
factors in our assessment of Chiquita's business risk profile include the 	
company's participation in the competitive, seasonal, commodity-oriented, and 	
volatile fresh produce industry, which is subject to political and economic 	
risks. We also consider the benefits of Chiquita's good geographical and 	
customer diversification, strong market positions, and its well-recognized 	
brand name.	
	
Chiquita is a leading producer, marketer, and distributor of bananas and other 	
fresh and processed foods sold under the Chiquita brand name and other brand 	
names. We believe Chiquita's operating performance is susceptible to 	
uncontrollable factors such as global supply, world trade policies, political 	
risk, currency swings, weather, and crop disease. Chiquita is more dependent 	
on volatile banana sales (64% of total 2011 sales) than its major competitors 	
(Dole Food Co. and Fresh Del Monte Produce). However, Chiquita is 	
geographically diversified, with about 43% of its sales outside of the U.S., 	
and has leading market positions in several markets. According to the company, 	
Chiquita has the No. 1 banana market position in Europe and the No. 2 position 	
in North America. In addition to bananas, Chiquita has the No. 1 position for 	
branded retail value-added packaged salad products in North America, although 	
its salad sales volumes experienced declines in 2011, continuing into 2012. 	
	
While Chiquita's operating results reflect the inherent volatility of the 	
produce industry, the company continues to perform below our expectations, 	
largely due to ongoing difficulties in its salads business. According to the 	
company, Chiquita's retail value-added salads volume declined 9.7% during full 	
year 2011 and declined 3.9% in the first quarter of 2012, relative to the 	
comparable prior-year periods. It is our opinion that ongoing weakness in the 	
salads category remains a risk as the company works to implement its revenue 	
growth strategy. For the quarter ended March 31, 2012, total sales decreased 	
about 3.8% and we estimate adjusted EBITDA decreased about 56% relative to the 	
first quarter of 2011, reflecting primarily lower banana prices and lower 	
retail value-added salad volume. The banana segment's 66% decline in operating 	
income, as reported by the company, relative to the first quarter of 2011, was 	
largely due to lower pricing and the absence in 2012 of the force majeure 	
surcharge in North America during the first half of 2011. We estimate the 	
company generated about $1 million of free operating cash flow during the 	
first three months of fiscal 2012, reflecting, in part, lower earnings and a 	
significant decrease in working capital relative to the first quarter of 2011.	
	
Chiquita's "highly leveraged" financial risk profile reflects the company's 	
significant debt obligations. Its ratio of lease- and pension-adjusted total 	
debt to EBITDA of about 7.2x for the 12 months ended March 31, 2012, compares 	
to 5.1x in the comparable prior-year period, and is well above our "highly 	
leveraged" indicative ratio range of greater than 5x. We estimate the ratio of 	
adjusted funds from operations (FFO) to total debt was about 16.1% for the 12 	
months ended March 31, 2012, compared to 23.3% in the prior year, and now 	
closer to the indicative ratio range of below 12% for a highly leveraged 	
financial risk profile. However, we also consider average credit measures in 	
our analysis because of the seasonality of the business and inherent 	
volatility of the fresh produce industry. We estimate rolling four-quarter 	
averages of pro forma lease-adjusted total debt to EBITDA and FFO to total 	
debt were about 6.3x and 19.3%, respectively, for the 12 months ended March 	
31, 2012. 	
	
Key assumptions in our fiscal 2012 forecast for Chiquita include:	
     -- Continued volatility in operating results and commodity input costs, 	
with cost reduction measures not enough to avoid a reduction in operating 	
margins;	
     -- No revenue growth in 2012, reflecting decreased sales growth in the 	
bananas segment and negative rates in the salads and healthy snacks and other 	
produce segments;	
     -- EBITDA margin of about 3.2%, primarily reflecting lower operating 	
margins for the bananas segments;	
     -- Capital expenditures of about $65 million; 	
     -- Relocation costs of about $20 million; and 	
     -- Estimated break-even free operating cash flow for the year as working 	
capital requirements and capital expenditures decline relative to 2011.	
	
We expect credit measures to remain near recent levels over the near term, 	
including projected average adjusted debt to EBITDA above 6x and average FFO 	
to total debt above 12% at the end of fiscal year 2012.	
	
Liquidity	
We believe Chiquita's liquidity is "adequate", with sources of cash likely to 	
exceed cash uses for the next 12 months. Our assessment of Chiquita's 	
liquidity profile incorporates the following expectations, assumptions, and 	
factors:	
	
     -- We expect cash flow sources will cover uses in excess of 1.2x for the 	
next 12 months.	
     -- We estimate that liquidity sources would continue to exceed uses even 	
if EBITDA were to decline by 15% from forecasted levels. We also test higher 	
declines in EBITDA because of the inherent volatility of the produce industry, 	
and net sources of cash are projected to be negative if EBITDA declined by 30% 	
from forecasted levels.	
     -- Maintenance financial covenants consist of a minimum fixed-charge 	
coverage test of 1.15x and a maximum operating company leverage test of 3.5x, 	
which do not become more restrictive over the life of the agreement. As of 	
March 31, 2012, we believe the company was in compliance with its financial 	
covenants and estimate that Chiquita had covenant headroom that would allow 	
for EBITDA to decline by about 10% without the company breaching these tests. 	
Although this level of covenant cushion is less than the 15% we normally 	
expect for an "adequate" liquidity descriptor, it is our understanding that 	
the company is entering into discussions with its bank credit facility lenders 	
that include seeking greater flexibility in its covenant test levels.	
     -- The company has moderate debt maturities over the near term.	
     -- The company has sound relationships with its banks, in our view.	
	
Cash sources include revolver availability and cash flow from operations. As 	
of March 31, 2012, Chiquita reported about $41 million in cash on its balance 	
sheet, and had $129 million available under its $150 million revolving credit 	
facility (reflecting $21 million in letters of credit outstanding). The 	
revolving credit facility matures in 2016, subject to an early maturity date 	
of May 1, 2014, if the company's 7.5% senior notes due 2014 are not repaid or 	
refinanced by then, and can be increased by up to $50 million under certain 	
circumstances. Peak seasonal working capital needs typically occur in the 	
first quarter. We expect the company will maintain adequate cash balances and 	
availability on its credit facility to fund seasonal working capital needs and 	
its debt service requirements. Chiquita's term loan amortizes at about $4 	
million per quarter through June 2013, increasing to about $8 million per 	
quarter thereafter to maturity. We believe the company will generate very 	
modest free cash flow after capital expenditures, which management estimates 	
at up to $65 million in 2012. 	
	
Recovery analysis	
The issue-level ratings on Chiquita Brands LLC's senior secured facilities, 	
consisting of a $150 million revolving credit facility and an initial $330 	
million term loan maturing in 2016, are 'BB-' (two notches higher than the 	
corporate credit rating). The recovery rating on this debt is '1', indicating 	
our expectation for very high (90% to 100%) recovery in the event of a payment 	
default. The issue-level ratings on Chiquita Brands International's 7.5% 	
senior unsecured notes and 4.25% senior convertible notes are 'B-' (one notch 	
below the corporate credit rating). The recovery rating on this debt is '5', 	
indicating our expectation for modest (10% to 30%) recovery in the event of a 	
payment default. For the complete recovery analysis, see Standard & Poor's 	
recovery report on Chiquita published on RatingsDirect on July 28, 2011. 	
	
Outlook	
The negative outlook reflects our estimate that Chiquita's financial covenant 	
cushion could decline below 10% during 2012, given our uncertainty about 	
improvement in its weakened operating performance. We expect credit measures 	
will remain close to current levels over the near term, including rolling 	
four-quarter average lease-adjusted leverage above 6.0x. We could consider 	
lowering the ratings if Chiquita's operating performance continues to decline, 	
if liquidity becomes constrained, if covenant cushion declines below 10%, or 	
credit protection measures meaningfully weaken and rolling four-quarter 	
average lease-adjusted leverage is sustained significantly above 6.0x. We 	
estimate this could occur if banana segment pricing does not recover 	
significantly and salad sales volumes continue to decline such that total 	
EBITDA declines to below $100 million, or if the company is unable to secure 	
improved covenant cushion levels from its bank credit facility lenders. 	
	
We could consider revising the outlook to stable over the next 12 months if 	
the company demonstrates improved performance, particularly within its salads 	
segment; is able to reduce and maintain average leverage under 6x; maintains 	
FFO to total debt of over 12%; and improves its financial covenants cushion 	
and maintains it at a level of at least 15%.	
	
Related Criteria And Research	
	
     -- Methodology And Assumptions: Liquidity Descriptors For Global 	
Corporate Issuers, Sept. 28, 2011 	
     -- Key Credit Factors: Criteria For Rating The Global Branded Nondurable 	
Consumer Products Industry, April 28, 2011 	
     -- Criteria Guidelines for Recovery Ratings, Aug. 10, 2009 	
     -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009 	
     -- Our Rating Process, April 15, 2008	
	
Ratings List	
Rating Affirmed; Outlook Revised	
                              To             From	
Chiquita Brands International Inc.	
 Corporate credit rating      B/Negative/--  B/Stable/--	
	
Ratings Affirmed; Recovery Ratings Unchanged	
Chiquita Brands International Inc.	
 Senior unsecured             B-	
   Recovery rating            5	
	
Chiquita Brands LLC	
 Senior secured               BB-	
   Recovery rating            1
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