TEXT-S&P rates Michael Foods notes 'CCC+'
Dec 10 - Standard & Poor's Ratings Services' today assigned ratings to Minnetonka, Minn.-based Michael Foods Group Inc.'s proposed $275 million senior unsecured payment-in-kind (PIK) toggle notes due 2018, issued under Rule 144A without registration rights. The notes will be issued by Michael Foods Holding Inc., parent company of Michael Foods Group. We rated the PIK toggle notes 'CCC+' (two notches below our 'B' corporate credit rating on Michael Foods Group) with a recovery rating of '6', indicating expectations for negligible (0% to 10%) recovery in the event of a payment default. (For the recovery analysis, see Standard & Poor's recovery report on Michael Foods, to be published on RatingsDirect following the release of this report.) Michael Foods has indicated that it will use proceeds from the proposed note offering along with balance sheet cash to fund a $317 million dividend to its sponsors, GS Capital Partners and TH Lee Partners. The notes will not be guaranteed by any of the issuer's subsidiaries and will be structurally subordinated to the existing senior secured credit facilities and existing senior notes of Michael Foods Group. As of Sept. 29, 2012, Michael Foods had about $1.27 billion of debt outstanding. The 'B' corporate credit rating on Michael Foods Group Inc. reflects our view of the company's financial risk profile as "highly leveraged" and its business risk profile as "weak." Key credit factors in our business risk assessment include our view of the company's exposure to volatile commodity costs, product concentration, and participation in highly competitive segments with larger competitors. Michael Foods Group benefits from its strong market position in its core egg products business and a growing value-added product portfolio. We view the company's financial profile as highly leveraged based on its significant debt burden and very aggressive financial policy. Credit protection measures will weaken following the issuance of the proposed notes. For the 12 months ended Sept. 29, 2012, we estimate pro forma total debt to adjusted EBITDA will be high at 6.4x, as compared with 5.2x excluding the new notes. We estimate the ratio of pro forma funds from operations (FFO) to total debt will decline to 7.9% for the 12 months ended Sept. 29, 2012, from 9.6% excluding the new notes. We expect credit measures will improve modestly over the next year as the company applies free cash flow towards debt reduction. These credit measures are in line with our "highly leveraged" indicative ratios of leverage over 5x and FFO to total debt below 12%. Related Criteria And Research -- Summary: Michael Foods Group Inc., Oct. 29, 2012 -- Key Credit Factors: Criteria For Rating The Global Branded Nondurable Consumer Products Industry, April 28, 2011 -- Criteria Guidelines For Recovery Ratings On Global Industrial Issuers' Speculative Grade Debt, Aug. 10 2009 Rating List Michael Foods Group Inc. Corporate credit rating B/Stable/-- New Ratings Michael Foods Holdings Inc. Senior unsecured $275 mil. PIK toggle notes due 2018 CCC+ Recovery rating 6 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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