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July 23 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned Findus PIK S.C.A. (holdco) an expected Issuer Default Rating (IDR) of 'CCC(EXP)' and its planned GBP200m PIK notes issue an expected debt rating of 'CC(EXP)'/'RR6'. The assignment of final ratings is contingent upon the receipt of the final documents conforming materially to the preliminary documentation received.
Findus PledgeCo S.a.r.l.'s (Findus) 'B-' Long-term Issuer Default Rating (IDR) and Findus BondCo S.A.'s senior secured notes 'B+' rating are unaffected by the proposed issue.
Fitch has not included the planned issue of GBP200m notes in its leverage ratios due to their equity-like characteristics, mainly the issuer's option to pay either PIK or cash interest. Fitch expects the interest on the new notes to be paid-in-kind given Findus's current limited financial flexibility. Given the neutral impact of the planned notes on Findus's cash flow and senior debt, the credit metrics of the restricted group are unchanged.
The GBP200m PIK notes will be issued outside of the restricted group and payment of interest in cash is optional rather than mandatory. The notes have a maturity of five years and the proceeds will be used to repay part of the issuer's existing preferred equity certificates (PECs). The PIK notes will represent a senior obligation of the issuer and will benefit from first-priority pledges over the share capital of the restricted group (Findus Special Intermediary) and over Findus PIK SCA's parent's (Findus Intermediary) PECs. There is no cross-default between the restricted group debt obligations and the PIK notes, but enforcement of the PIK notes share pledge would lead to a change of control event at the restricted group level.
The holdco's expected IDR of 'CCC(EXP)' is derived from Findus's 'B-' IDR reflecting its links to the operating performance of the restricted group but notched down to reflect the holdco's higher default risk. The higher default risk is largely attributable to the holdco's subordinated nature within the holding structure and significant limitations (e.g. restricted payments) to upstream payments from the restricted group.
The expected PIK notes' rating of 'CC(EXP)' reflects the deeply subordinated nature of these instruments relative to Findus's senior liabilities as well as the absence of direct claims over the restricted group other than a residual equity claim on Findus. Fitch believes that under a distressed scenario, this feature is likely to result in poor recovery ratings of 'RR6' in the range of 0%-10%.
Geographic and Product Diversity
Findus remains the leader in its key markets of Norway, Sweden, Finland and France, with high market shares in branded frozen food and a diverse product proposition of frozen fish and ready-to-eat meals. However, Fitch expects increasing private-label penetration and competition from chilled food to continue putting pressure on Findus group's profit margins. Cost savings, while limited, are expected to remain the key driver of profit growth.
Volatility in Commodity Prices
Sudden commodity price inflation, such as the recent all-time high price of salmon, in conjunction with greater volatility in food commodity markets will continue to challenge Findus, especially in the event of a slowdown in consumer spending. Meanwhile, the group is benefiting from continued investments in product innovation and successful negotiations of contracts with food retailers to pass on price increases in raw materials.
Scope for EBITDA Stability
Fitch expects product innovation and contract negotiations to mitigate raw material price increases. We therefore project that EBITDA margins should remain fairly stable at FY14's (year to September 2014) 8%. FY13 and 1HFY14 performances were in line with management's expectations despite challenges in frozen fish sales in Norway. EBITDA margins returned to the FY11 level after having previously been on a contracting path.
Resilient Food Consumption
Consumption of fast-moving consumer goods is fairly resilient through the economic cycle, although growth in mature and developed markets is limited. Findus's product innovation capabilities and targeted marketing spending are key to ensuring its product offering remains relevant to consumers amid changing economic conditions, consumer preferences, health concerns and food price inflation.
Findus has historically generated low levels of FCF, which is considered a weakness. Although we expect a mildly negative FCF margin in 2014 due to one-off costs for refinancing, exchange rate translational differences and working capital unwinding, we expect cash generation to improve, albeit remaining relatively weak at around 1% during FY14-FY16.
Findus's FFO adjusted gross leverage at end of the financial year to September 2013 (FYE13) post refinancing remained high at 6.4x. Fitch expects leverage to improve towards 5.5x with FFO fixed charge cover moving towards 1.8x by 2016. If maintained, this leverage profile would be considered relatively strong for the 'B-' rating relative to close peers.
Positive: Future developments that could, individually or collectively, lead to positive rating actions include:
- Improvement in operating profitability and organic business growth evidenced by EBITDA margin improvement up to 9% (FYE13: 7.9%) and FCF margin of 3% or higher (FYE13: 0.2%).
- Further de-leveraging with FFO adjusted leverage to or below 5.5x on a sustained basis (FYE13: 6.4x).
- FFO fixed charge cover at 2x or above on a sustained basis (FYE13: 2.3x).
Negative: Future developments that could, individually or collectively, lead to positive negative rating actions include:
- A contraction in organic revenue, for example resulting from increased competitive pressures, combined with a steady reduction in operating profitability leading to an EBITDA margin below 7%.
- Consecutive periods of negative FCF leading to erosion of the liquidity cushion.
- A sustained deterioration in FFO adjusted leverage to or above 7x.
- FFO fixed charge cover sustainably at 1.5x or below.
Fitch anticipates that Findus's liquidity will remain adequate, supported by a super senior RCF of GBP60m and, in the longer term, mildly positive FCF generation from FY15.
No Maturities Before 2018
Findus's current debt includes approximately GBP405m of senior secured notes maturing in July 2018, revolving credit facility (RCF) of GBP60m maturing in December 2017. While there is no debt amortisation pressure in the foreseeable future, we believe that the deleveraging path will be slow and dependent on growth in EBITDA. Fitch expects FFO adjusted leverage to remain above 5.5x until at least 2016.