March 4 (The following statement was released by the rating agency)
Fitch Ratings has assigned Premier Foods plc (PF) and
Premier Foods Finance plc the following expected ratings, upon completion of the
Premier Foods plc
Long-term Issuer Default Rating (IDR): 'B(EXP)', Outlook Positive
Premier Foods Finance plc
GBP475m planned Senior Secured Fixed Rate Notes due 2021: 'B(EXP)'/'RR4'
The 'B(EXP)' IDR reflects PF's market position as one of UK's largest ambient
food producers, with a diversified portfolio of leading brands across five
categories and with strong or leading competitive positions in well-established
categories ranging from ambient cakes to flavourings and seasonings. The
combination of a successful re-negotiated long-term pension reduction schedule,
rights offering, notes issue, completion of the capital structure refinancing
and sale of 51% of PF's bread division would provide PF with operational and
financial headroom, eliminating short-term concerns and facilitate greater
management focus on the business.
The Positive Outlook reflects Fitch's expectation that PF's financial and
business profile should improve over time when the major refinancing and equity
placing and rights issue efforts and the deconsolidation of its bread division
are completed. It also factors confidence in the positive momentum that PF's
grocery only business enjoys thanks to management's category-led strategy.
Should credit metrics remain near Fitch's expectations the ratings could be
upgraded to 'B+'.
The expected ratings are assigned under the assumption that the planned
refinancing of PF's current senior secured credit facility (GBP884m) with a new
senior secured revolving credit facility (GBP300m) and repayment from the
proceeds of a proposed senior secured notes (GBP475m) and the equity placing and
rights issue (GBP350m) go ahead as planned. As part of this restructuring plan,
PF is to agree a new pension deficit reduction schedule with its pension
trustees which will substantially reduce its annual cash contributions with
fixed contributions until 2019. The pension deficit reduction agreement is
conditional upon a successful rights issue of at least GBP250m in gross proceeds
at the latest on 30 June 2014. Final instrument ratings would be contingent upon
the receipt of final documentation conforming materially to information already
received. Failure to conduct the refinancing according to plan would result in
the withdrawal of the ratings.
Premier Foods Finance plc, the issuer of the planned notes, is a financing
vehicle 100% owned by PF. The notes and the senior secured revolving credit
facility (RCF) of GBP300m will be secured substantially by all of the issuer's
and guarantors' assets representing 97% of the group's consolidated total assets
as of 31 December 2013. The notes, RCF and pension trustees will maintain a
security sharing mechanism. The security offered to the pension funds will rank
pari passu with the notes and bank debt, limited to a maximum amount of GBP450m
although, as pension contributions reduce the deficit, security to the benefit
of the pension fund will not reduce below GBP350m.
KEY RATING DRIVERS
Leading UK Ambient Food Producer
PF is one of the UK's largest ambient food producers, with a 4.7% market share
in the fragmented and competitive GBP28bn UK ambient grocery market. PF
manufactures, distributes and sells a wide range of branded and non-branded
foods, across five categories with leading brands, some of which has been in
existence for more than 100 years. The company therefore benefits from its
diversity and scale in terms of manufacturing, logistics and procurement in the
Reliant on the UK
PF operates mainly in the UK and a significant portion of its turnover is from
the 'big four retailers' in the UK - Tesco (BBB+/Negative), Asda, J Sainsbury's
and Morrisons. However, it is active in categories generally not core to
multinational food manufacturers, which therefore limits competitive threats. In
addition, PF has a competitive position in many of its food categories where it
holds a number one or two market position. PF is also expanding across
geographies. In October 2013, PF signed a ten-year partnership agreement with
Swire Foods Holdings Ltd, to distribute Ambrosia rice pudding pot in China. This
agreement may extend to PF's other brands in the portfolio.
Standalone JV for Bread Division
The deconsolidation of the bread business through a standalone JV with the Gores
Group will allow management to focus its full attention and resources on
continuing to grow its grocery business. PF would be left with a higher margin
business (EBITDA margin of 18.7% in FY14E) compared with 11.9% in FY13 (before
deconsolidation). Fitch understands that other than the GBP15.7m (PF's share of
the committed GBP32m investment) to be invested in the JV on completion in FY14
and the potential GBP6.4m (PF's share of the remaining GBP13m investment) in
2016, there will be no future cash requirements from Premier Foods for the JV as
future investments for the bread division will be funded by internal cash flows
of the JV and external funding. Fitch assumes PF will not guarantee any of this
potential external funding.
Strong Grocery Margins
Fitch projects that EBITDA margin will increase to around 20% in FY16 from 18.7%
in FY14 (Fitch's estimate post-disposal of bread division). Although this
depends on the future level of marketing investments, our expectation of
improved margins relates to cost savings and efficiency initiatives that PF has
undertaken since 2012 as part of its ongoing effort to simplify the business
following its disposal activity during 2011-2013. PF exceeded its 2012 GBP20m
target by delivering savings of GBP48m and delivered a further GBP20m savings in
Weak Credit Metrics
The business strengths are offset by PF's weak credit metrics. Despite the new
agreed pension deficit reduction schedule, Fitch estimates that the pension
deficit contribution has a 1.4x-1.9x adverse impact on FFO adjusted net leverage
over FY13- FY16. Fitch projects FFO adjusted net leverage will be 5.9x in FY14
(post-refinancing) but should marginally reduce to 5.7x by 2016. The agency
expects FFO fixed charge coverage to be around 2x over FY14-FY16. In addition to
high interest costs, PF's FFO is compressed by recurring pension deficit
contributions, which Fitch includes in the calculation of FFO. Higher than
expected pension deficit contributions or post-refinancing cost of funding
would, among other factors, have an adverse impact on projected credit metrics
and could in turn affect rating headroom.
Fitch anticipates that post-refinancing, PF's liquidity will be adequately
supported by a renegotiated GBP350m RCF due in 2019 with appropriate covenant
headroom and by the lack of material short-term debt maturities in the next five
years apart from the negotiated pension deficit contributions (ranging from
GBP7m p.a. in FY15 to GBP45m in FY17-FY19) and the GBP120m securitisation
facility due December 2016 (expected to reduce to GBP60m post-deconsolidation of
the bread business).
Senior Secured Notes' Rating
The 'B(EXP)'/'RR4' senior secured rating reflects Fitch's expectations that the
enterprise value of the company and the resulting recovery of its creditors
(including the pension trustees) would be maximised in a restructuring scenario
(going concern approach) rather than a liquidation due to the asset-light nature
of the business as well as the strength of its brands. Furthermore, a default
scenario would likely be triggered by unsustainable financial leverage, possibly
as a result of weak consumer spending or unexpected higher pension deficit
contributions. As such, Fitch applied a 30% discount to EBITDA and believes a
distressed multiple of 6.0x is appropriate. This results in average expected
recoveries (31%-50%) for senior secured noteholders in the event of default.
Positive: Future developments that may, individually or collectively, lead to
positive rating action (an upgrade to 'B+'/Stable) include:
- PF's ability to maintain EBITDA margin above 18% after having sufficiently
invested in A&P to protect its market position and drive growth with its
- FFO adjusted net leverage demonstrating a path moving sustainably below the
5.5x-6.0x range (pension deficit contributions are included in the calculation
- FFO fixed charge coverage above 2.0x on a sustained basis.
- Free cash flow margin above 4% after adequate capital investments.
Negative: Future developments that may, individually or collectively, lead to
negative rating action (revision of the Outlook to Stable) include:
- Reduced free cash flow margin below 4% of sales as a result for instance of
profitability erosion, higher capex or unexpected increases in pension
contribution or funding costs.
- FFO adjusted net leverage remaining in the 5.5x to 6.0x range on a sustained
basis (pension deficit contributions are included in the calculation of FFO).
- FFO fixed charge coverage below 1.8x on a sustained basis.