RPT-Fitch assigns Findus PledgeCo S.a.r.l final 'B-' rating
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Aug 8 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned Findus PledgeCo S.a.r.l (Findus) a final long-term foreign currency Issuer Default Rating (IDR) of 'B-' with a Stable Outlook. Fitch has also assigned a final instrument rating of 'B+'/'RR2' to Findus BondCo S.A.'s 9.5% sterling and 9.125% euro senior secured notes maturing July 2018. The notes refinance the existing senior term debt facilities.
Fitch notes the tighter interest cover than forecasted at the time the expected ratings were assigned on 9 July 2013 due to the higher than expected coupon for the senior secured notes. However Fitch's forecast credit metrics remain within the parameters defined for the 'B-' IDR. The notes have a maturity of five years and are non-call for two years.
The final ratings follow a review of the final documentation which materially conform to information received at the time the agency assigned the expected ratings (see 'Fitch Assigns Findus 'B-(EXP)' Rating; Proposed Senior Secured Notes 'B+(EXP)' dated 9 July 2013 at www.fitchratings.com), including the EUR60m super senior revolving credit facility (RCF) that can be increased to whichever is greatest of EUR100m or 110% of consolidated EBITDA.
KEY RATING DRIVERS
Funds from operations (FFO) adjusted leverage at year-end 2013 (pro forma for the refinancing) of more than 7x remains high while FFO/fixed charge cover is only at 1.5x. Fitch expects leverage to improve gradually towards 6x respectively with FFO fixed charge cover improving slightly towards 1.7x. Fitch has not treated any of the subordinated debt including Junior MidCo PEC, Senior Midco notes, Tracker PEC and On-loan PEC instruments as debt due to their equity alike characteristics, including either contractual or structural subordination, the absence of security and/or material independent enforcement rights, longer dated maturities, PIK for life.
Resilient Food Consumption but Limited Growth
Consumption of fast moving consumer goods is relatively resilient throughout the economic cycle albeit growth in mature, developed markets is limited. Findus' product innovation and effective marketing spend are key to ensure its product offering remains relevant to consumers in the context of changing economic conditions, consumer preferences, health concerns and fluctuations in food prices. The horse-meat issue that emerged in early 2013 and directly affected 0.9% of Findus product sales appears to have had minimal impact on the Findus brand and the group's overall financial performance so far.
Findus remains the market leader in its key markets of Norway, Sweden, Finland and France with high market shares in branded frozen food although we expect increasing private label penetration and competition from chilled food to continue putting pressure on Findus group's profit margins. In Southern Europe, revenue support spend will drive pricing pass through albeit with limited EBITDA upside until 2014. Findus' UK business remains low margin. While opportunities exist for management to extract further cost savings (mainly in the Nordics), intense competition in frozen and sector overcapacity issues in chilled will hamper any meaningful recovery in UK profitability. Cost savings, albeit limited, are expected to remain the key driver of profit growth.
Volatility in Commodity Prices
Sudden commodity price inflation in conjunction with greater sourcing volatility in food commodity markets will continue to challenge Findus. New management will need to demonstrate how to effectively compete against larger and more diversified branded players during periods of rising input costs through e.g. price increases as part of product reformulations. Findus needs to demonstrate its commitment to achieving a lean cost structure leading to greater profit stability and margin expansion bringing it more in line with close peers.
Findus' liquidity is deemed adequate with an estimated GBP32m of cash and marketable securities on balance sheet post refinancing and access to an initially undrawn GBP60m (increased from GBP50m) super senior RCF. Moreover, the group's expected generation of annual cash flow from operations (CFO) between GBP20m and GBP35m over the forecasted period should provide sufficient funding for the group's operating needs including working capital requirements and capex.
Expected Recovery for Creditors upon Default
The senior secured notes' 'B+'/'RR2' rating reflects Fitch's expectation of superior recoveries in the range of 71%-90% in case of default. The instrument's rating is reflective of Findus' high FFO adjusted leverage above 7x and takes into account a GBP60m super senior RCF inter alia effectively ranking ahead of the bond. Driving these recovery expectations is an estimated post restructuring EBITDA at approximately GBP83m reflecting a hypothetical adverse scenario of depressed sales and compressed margins as a function of increased competition and elevated commodity prices and a going concern multiple of 5x enterprise value/EBITDA.
Future developments that could lead to positive rating actions include:
- Improvement in operating profitability and organic business growth evidenced by EBITDA margin improvement up to 9% and free cash flow margin of 3% or higher.
- Further de-leveraging with FFO adjusted leverage to or below 5.5x on a sustained basis.
- FFO fixed charge cover at 2x or above on a sustained basis. Future developments that could lead to negative rating action include:
- A contraction in organic revenue combined with a continued and permanent reduction in operating profitability leading to an EBITDA margin below 7%
- Consecutive periods of negative cash flow leading to erosion in the liquidity cushion
- A sustained deterioration in FFO adjusted leverage to or above 7x
- FFO fixed charge cover sustainably at 1.5x or below
- Inability to procure long-term refinancing ahead of the existing debt maturities
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