(Repeat for additional subscribers)
March 4 (The following statement was released by the rating agency)
Fitch Ratings has assigned French packaged food company Labeyrie Fine Foods SAS (LFF) an
expected Long-term issuer Default Rating (IDR) of 'B(EXP)' with Stable Outlook. Fitch has
assigned LFF's proposed EUR275m senior secured notes a 'B+(EXP)'/'RR3' expected rating.
The final ratings are contingent on the proposed refinancing of LFF taking place
and the final terms conforming with those already received. Failure to conduct
the refinancing according to plan would result in the withdrawal of the ratings.
The expected ratings reflect LFF's high business risk profile, somewhat
compensated by a relatively conservative leverage structure and good free cash
flow (FCF) generation capacity. While Fitch positively factors in the proven
resilience of its sales and profitability as well as its leading brands
positions, it also takes into account LFF's small scale, high seasonality of
sales and relatively low customer, products and geographic diversification.
Fitch believes these characteristics would exacerbate the effect of an external
shock on revenues and profit. This risk is partially compensated by low leverage
relative to Fitch-rated packaged food leveraged peers and its healthy, albeit
low cash flow generation capacity, underpinned by steady profit generation and
limited working capital and capex needs.
In Fitch's view, an upgrade to 'B+' would only be possible if leverage was
lower, to further increase financial flexibility in view of the high business
risk, or there was greater scale and diversification of sales, leading to
enhanced profit margins and higher FCF generation.
KEY RATING DRIVERS
Resilient Business Model
LFF's sales resilience reflects its niche positioning in the premium pleasure
food market, which has proven highly stable through economic cycles. The group
also benefits from the leading position of its core brands in the French market,
underpinned by its high-quality image. The stability in profit margins through
economic and commodity price cycles is essentially ensured by management's
adequate raw materials purchase strategy and its proven ability to pass cost
increases on to its food retail customers, albeit with some delays. Fitch
expects LFF's EBITDA margin to remain at or be slightly above the FY13 level of
8.2% over the next few years despite prospects of increasing raw material prices
and higher marketing investments.
Highly Seasonal Sales and Profit
High seasonality represents a significant business and financial risk,
especially if coupled with an external shock. As LFF generates on average 41%
and 66% of its sales and EBITDA respectively between October and December, if
the company suffered a shock during the Christmas season it would leave limited
margin for manoeuvre to catch up sales and profit shortage over the rest of the
year. Therefore LFF could struggle to repay its short-term facilities due to
inventories and account receivables piling up in consequence.
Limited Scale and Diversification
Compared with most of Fitch's non-investment grade rated packaged food peers,
LFF exhibits a small scale. Limited geographic (mostly mature France and UK),
product categories (foie gras and smoked salmon made 59% of FY13 sales), and
customer (top ten clients represented 74% of FY13 sales) diversification leads
to high business risk. Diversification is all the more critical for protein
producers, like LFF, as they can be exposed to food scares. For LFF this is only
partially mitigated by the group's high-quality image, presence across various
food counters, and the fact its business units are run separately. LFF's
positive efforts at diversifying its geographies, customer base and products
will only generate meaningful benefits in the long term as they are financially
limited by its relatively low, albeit positive, cash generation capacity.
Compared with entities rated 'B' by Fitch we also positively factor the moderate
leverage implied by the refinancing, with lease-adjusted FFO gross leverage
expected at 5.0x at FYE14 against 5.2x at FYE13. Fitch views a moderately
leveraged structure as necessary to compensate for LFF's high business risk
profile. From a cash generation perspective the higher interest payments implied
by the bond issuance, in comparison with bank term loans, are compensated by the
absence of amortising debt.
Good FCF Generation Capacity
LFF's FCF generation will be reduced due to higher interest payments. However,
it should remain positive at between 1% and 2% of sales per annum over the next
four years thanks to low single-digit top-line growth and the EBITDA margin
remaining resilient, limited working capital outflow due to continued tight
management, and relatively low capex needs. This leaves a degree of financial
flexibility for bolt-on acquisitions. With limited M&A activity, FCF generation
should allow the company to deleverage below 4.0x by FY16 on a lease-adjusted
net FFO basis, from 4.4x in FY13.
Senior Secured Notes' Rating
The 'B+(EXP)'/'RR3' senior secured notes' rating indicates above average
expected recoveries in the range of 51%-70%. The instrument rating takes into
account a EUR35m revolving credit facility (RCF) ranking senior to the bonds in
the payment waterfall and half of maximum amount available under a factoring
line of EUR80m as average annual draw-down. Despite being non-recourse Fitch
estimates the factoring line is of strategic interest, and therefore includes it
as a super-senior claim. Driving the recovery expectations is a
post-restructuring EBITDA approximately 25% below the group's adjusted LTM June
213 EBITDA of EUR61.8m. This level reflects a hypothetical adverse scenario of a
significant shock to the issuer's profitability. Combined with an estimated
going concern multiple of 6x enterprise value/EBITDA, this results in a more
favourable valuation than Fitch's alternative estimation of a liquidation
Positive: Future developments that could lead to positive rating actions
- EBITDAR margin above 10% on a sustained basis.
- FCF margin sustained above 5%.
- FFO adjusted gross leverage below 4.0x.
- FFO fixed charge coverage above 3.5x.
Negative: Future developments that could lead to a negative rating action
- EBITDAR margin below 7.5% on a sustained basis.
- Negative FCF margin.
- FFO adjusted gross leverage above 6.0x.
- FFO fixed charge coverage below 2.0x.
LIQUIDITY AND DEBT STRUCTURE
Streamlined Debt Structure
LFF's refinancing exercise, which includes the reimbursement of LFF's bank
facilities as well as expensive convertible bonds, would lead to a simpler
capital structure as the EUR275m high-yield bond would become the bulk of the
Following the debt refinancing, Fitch expects LFF to benefit from comfortable
liquidity. It would be underpinned by an adequate amount of short-term
facilities to fund working capital needs, which include a EUR35m RCF and a
EUR80m factoring line allowing cheap receivables financing. Liquidity would be
further supported by positive FCF generation and the absence of scheduled debt