TEXT-Fitch raises Dean Foods ratings
Nov 5 - Fitch Ratings has upgraded the secured bank credit facility and senior unsecured debt ratings of Dean Foods Company (Dean; NYSE: DF) and the senior unsecured debt rating of Dean Holding Company as follows: Dean Foods Company (Parent) --Issuer Default Rating (IDR) to 'B+' from 'B'; --Secured bank credit facility to 'BB+/RR1' from 'BB/RR1'; --Senior unsecured debt to 'BB-/RR3' from 'B-/RR5'. Dean Holding Company (Operating Subsidiary) --IDR to 'B+' from 'B'; --Senior unsecured debt to 'BB-/RR3' from 'B-/RR5'. Fitch has also placed the ratings on Rating Watch Positive. At June 30, 2012, Dean had $3.6 billion of total debt, down from $3.8 billion at March 31, 2012. Rating Rationale: The upgrade and Positive Rating Watch are due to Dean's focus on debt reduction and Fitch's view that further deleveraging is possible following the spin-off of The WhiteWave Food Co. (NYSE: WWAV) and potential divestiture of Morningstar. Increased profitability at Dean's Fresh Dairy Direct (FDD) operation, which is comprised mostly of fluid milk, has also contributed to improvement in the firm's credit profile. While raw milk costs have increased because of the recent spike in corn prices, Fitch believes this inflation can be partially offset by price realization, operating efficiency, and relative volume performance. During 2011, FDD represented 74% of Dean's $13.1 billion of sales and 54% of its $645 million of operating income excluding corporate expenses. WhiteWave-Alpro represented 16% of sales and 31% of operating income excluding corporate expenses, and Morningstar represented the remaining 10% and 15%, respectively. On Oct. 31, 2012, $282 million of net proceeds from the IPO of a 13% ownership stake in WWAV together with approximately $885 million of borrowings under WWAV's $1.35 billion secured credit facilities funded a $1.2 billion distribution to Dean through the repayment of an inter-company note. Dean used the proceeds from WWAV to repay all outstanding loans under its term loans due April 2, 2014. Dean intends to affect a tax-free spin-off of all or a portion of its approximate 87% ownership interest in WWAV no earlier than the expiration of the 180-day lockup period following the closing of the IPO. Until the spin-off, Dean will still consolidate WWAV. According to an Oct. 17, 2012 S-1 filing, WWAV generated $2.0 billion of sales and $236.6 million of EBITDA during 2011. On Sept. 26, 2012, Dean announced that it was exploring the sale of its Morningstar business. Morningstar produces and sells items such as cultured dairy products, ice cream mixes, coffee creamers, aerosol whipped toppings, and blended iced beverages to retailers and foodservice providers nationwide. During 2011, Morningstar generated approximately $1.3 billion of sales and $122 million of EBITDA. Fitch believes Dean could sell this business at 6x to 8x EBITDA resulting in significant additional cash that might be used for debt reduction. Pro forma leverage and FCF expectations following the spin-off of WhiteWave and potential divestiture of Morningstar are fundamental to Fitch's analysis. Fitch anticipates that Dean will generate approximately $10 billion of annualized sales, $500 million of EBITDA and could have less than $1.5 billion of total debt as a pure play traditional dairy business. Fitch also expects Dean's traditional dairy business FCF generation to exceed $100 million annually as interest expense declines and capital expenditures are reduced to reflect the needs of its standalone FDD operations. Dean's ratings consider FDD's mid-single digit operating margin, volatile earnings profile, excess milk processing capacity for the industry, and gradual declines in category volumes. These negatives are balanced against Dean's conservative financial policies along with its market share leadership and national direct store delivery capabilities, which Fitch views as competitive advantages. Credit Statistics: For the LTM period ended June 30, 2012, total debt-to-operating EBITDA was 4.1x, down from 5.3x at Dec. 31, 2010, and operating EBITDA-to-gross interest expense was 3.6x, up from 3.1x. LTM FCF was $206.1 million, modestly lower than the company's $263 million annual average over the past five years, excluding the debt-financed $15/share special dividend in 2007. In August 2012, Dean expected its leverage ratio, as defined by its credit agreements, to decline to approximately 3.5 times (x) if WWAV's IPO and debt raise closed by the end of 2012. Fitch believes total debt-to-operating EBITDA can approximate 3.0x following the spin-off of WWAV and divestiture of Morningstar. Recovery Ratings: The 'BB+/RR1' rating on Dean's secured debt reflects Fitch's view that recovery prospects for these obligations would be outstanding at 91% - 100% if the firm filed for bankruptcy. The debt is secured by a perfected interest in substantially all of Dean's assets. The 'BB-/RR3' unsecured rating is due to Fitch's opinion that bondholder recovery would be good at 51% - 70% in a distressed situation. Recovery prospects for unsecured bondholders could improve further following the spin-off of WhiteWave and potential additional debt reduction with the proceeds from the sale of Morningstar. Liquidity, Maturities, and Financial Covenants: Fitch views Dean's liquidity as adequate. At June 30, 2012, the firm had $60.4 million of cash, $1.2 billion available under its secured revolver, and $185 million under its receivables-backed facility. Dean's $1.3 billion revolver expires April 2, 2014 and its $600 million on-balance sheet receivables-backed facility matures on Sept. 25, 2013. Dean voluntarily reduced the size of its revolver to $1 billion on Oct. 31, 2012. Scheduled maturities of long-term debt at June 30, 2012 were $103.5 million in 2012, $376.2 million in 2013, and $1 billion in 2014. These maturities consisted mainly of term loans and balances outstanding under the revolver and receivables-backed facility. Financial maintenance covenants in Dean's credit facility currently include maximum total and senior secured leverage ratios. The calculation excludes up to $100 million of unrestricted cash and adjusts for charges and non-recurring items therefore bank leverage ratios are modestly lower than those calculated by Fitch. The total leverage covenant is currently 5.5x, stepping down to 5.25x on March 31, 2013 and 4.5x on Sept. 30, 2013. The senior secured leverage restriction of 3.75x, steps down to 3.5x on March 31, 2013. Dean is also bound by a minimum interest coverage requirement of 2.75x which steps up to 3.0x on March 31, 2013. Dean reported total leverage and senior secured leverage, as calculated by its credit agreement, of 3.96x and 2.79x, respectively at June 30, 2012, which indicates EBITDA cushion in excess of 20%. What Could Trigger A Rating Action Future developments that may, individually or collectively, lead to a positive rating action include: --Total debt-to-operating EBITDA in the mid-3.0x range or lower and continued good FCF generation post the spin-off of WWAV and divestiture of Morningstar could result in additional upgrades; --Continued structural improvement in Dean's FDD business and a rational wholesale pricing environment are also critical factors surrounding future rating upgrades. Future developments that may, individually or collectively, lead to a negative rating action include: --A sustained period of materially higher than expected leverage; such that total debt-to-operating EBITDA consistently exceeds 4.5x, could trigger a downgrade in Dean's existing ratings; --Negative FCF generation, additional step downs in FDD's profitability due to lower gross profit and/or wholesale pricing concessions could influence future downgrades in ratings.