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Fitch Upgrades Dean's IDR to 'BB-'; Outlook Stable
April 30, 2013 / 4:30 PM / 4 years ago

Fitch Upgrades Dean's IDR to 'BB-'; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, April 30 (Fitch) Fitch Ratings has taken various rating actions on Dean Foods Co. (Dean; NYSE: DF) and Dean Holding Co. The following ratings have been upgraded: Dean Foods Company (Parent) --Issuer Default Rating (IDR) to 'BB-' from 'B+'. Dean Holding Company (Operating Subsidiary) --IDR to 'BB-' from 'B+'. The following ratings have been affirmed: Dean Foods Company (Parent) --Secured bank credit facility at 'BB+'; --7.0% senior unsecured notes due June 1, 2016 at 'BB-'; --9.75% senior unsecured notes due Dec. 15, 2018 at 'BB-'. Dean Holding Company (Operating Subsidiary) --6.9% senior unsecured notes due Oct. 15, 2017 at 'BB-'. Fitch has simultaneously withdrawn its Recovery Ratings given reduced probability of default at the 'BB' IDR level. Dean's ratings have been removed from Rating Watch Positive where they were placed on Nov. 5, 2012. A Stable Rating Outlook has been assigned. At Dec. 31, 2012, Dean had $3.1 billion of total debt. Approximately $2.3 billion was at the Dean Foods Co. and Dean Holding Co. level while $781 million was at the firm's publicly traded majority-owned subsidiary - The WhiteWave Food Co. (WWAV). Key Rating Drivers: The upgrade is due to Dean's considerably lower debt balance following the divestiture of its Morningstar operations and the subsequent application of proceeds to repay term loans. Furthermore, Fitch believes that total debt-to-operating EBITDA, post the spin-off of WWAV, can be maintained below 3.0x in most years. Ratings incorporate Dean's intention to spin off the majority of its 86.7% economic interest in WWAV by late May and to retain up to 19.9% or 34.4 million of WWAV shares. Dean plans to monetize or distribute the remaining ownership to its shareholders in a tax-free manner at a later date. Fitch is not anticipating further debt reduction beyond amounts discussed below but believes the maintenance of WWAV shares add to Dean's financial flexibility. On Jan. 3, 2013, Dean completed the sale of Morningstar for $1.45 billion of pre-tax proceeds or an estimated $887 million of proceeds net of taxes and expenses. The purchase price was approximately 9.4x Morningstar's LTM EBITDA or about 8x EBITDA after giving effect to the tax structure of the transaction. Due to the staged timing of associated tax payments, the firm used the majority of the pre-tax cash to fully retire all of its secured term loans. Dean repaid $480 million of 2016 tranche B term loans, $547 million of 2017 tranche B term loans, and $265 million of revolver balances outstanding at Dec. 31, 2012. Over the past year, Dean has used proceeds from the IPO of WWAV, asset sales, and internally generated cash flow to repay more than $2 billion of debt. Post the use of Morningstar divestiture proceeds to pay off term loans, Dean's total debt approximates $1.8 billion. Dean has $1 billion of long-term bonds and $781 million of debt related to WWAV's senior secured credit facilities. Fitch projects that Dean will have about $1.3 billion of total debt at Dec. 31, 2013, following the spin-off of its majority ownership in WWAV and the payment of taxes associated with the divestiture of Morningstar. Fitch's ratings continue to incorporate Dean's mid-single-digit EBITDA margin, volatile operating earnings and cash flow, and limited diversification following the separation of its higher margin and faster growing WWAV and Morningstar operations. However, these negatives are balanced against the firm's lowered debt levels, positive free cash flow (FCF) generation, and historical success reducing costs. Ratings also consider the fundamental challenges faced by the fluid milk industry which continues to have excess capacity, experience low-single-digit volume declines, and exhibit high levels of competition. The dairy industry also remains highly sensitive to volatile raw milk prices. The Class I mover, milk used for fluid milk, price averaged $18.30 per hundredweight (cwt) during the first quarter of 2013, approximately 6% higher than the prior year's quarter, after increasing to near historical levels of $21.39 per cwt for the month of December 2012. As of April 2013, the USDA expects the All Milk price index to increase an average of 6.4% in 2013 to $19.70 per hundredweight in 2013. Pro Forma Credit Statistics and Financial Strategy: For the LTM period ended Dec. 31, 2012, Dean's consolidated funded debt-to-EBITDA as defined by its credit facility was 3.54x, down from 5.1x at Dec. 31, 2010. On a pro forma basis, excluding WWAV's debt, the EBITDA of both WWAV and Morningstar and the related debt reduction discussed above, leverage is 2.85x. Fitch projects that total debt-to-operating EBITDA, inclusive of five months of EBITDA from the consolidation of WWAV, could end 2013 at about 2.5x. For 2014, the first full year following the spin-off of WWAV, Fitch is projecting total debt-to-operating EBITDA of about 2.7x. Dean expects to finalize details related to the firm's financial strategy over the next several months but has indicated a desire to achieve and maintain leverage below 2.5x and to focus on FCF generation. The firm's 2013 guidance, excluding WWAV, includes EBITDA of $430 million-$460 million, $110 million-$115 million of interest expense, and about $150 million-$175 million of capital expenditures. Fitch believes Dean can generate an average of $100 million of FCF annually post WWAV and Morningstar. However, reported FCF could be negative in 2013 due mainly to one-time items and cash taxes related to the divestiture of Morningstar. Core Operations and Operating Strategy: Post the divestiture of Morningstar and spin-off of WWAV, Dean's core Fresh Dairy Direct (FDD) business will consist of about $9 billion of annual sales and, based on management's $430 million-$460 million EBITDA guidance for 2013, will generate an EBITDA margin in the 5% range. Incorporated in management's guidance is the expectation that the financial impact of a low-single-digit decline in volume at FDD, magnified by lost volume associated with a bid for private-label milk business early in 2013, will be offset by lower corporate expenses. Dean continues to emphasize price realization and volume performance relative to the industry. The firm is also accelerating cost reduction efforts related to distribution and manufacturing as well as general and administrative expenses, announcing plans to eliminate an additional 10%-15% of its production capacity. After realizing $300 million from multi-year productivity initiatives since 2009, Dean is targeting another $120 million annual run rate of savings by the end of 2013. Fitch views the rationalization of processing operations as necessary given excess industry capacity and competition among processors but is concerned about the timing given the historical pace of plant closures. Liquidity, Maturities, and Financial Covenants: At Dec. 31, 2012, Dean had over $1.7 billion of liquidity consisting of $79 million of cash, $734 million of availability on its $1 billion secured revolver, $342 million of capacity on its receivables-backed facility, and $569 million available under WWAV's $850 million secured revolver. Dean's $1 billion revolver expires April 2, 2014 and its $550 million on-balance sheet account receivables-backed facility matures on March 8, 2015. Fitch expects the firm to renegotiate its revolver in the near term. Scheduled maturities of long-term debt at Dec. 31, 2012 were $26 million in 2013, $291 million in 2014, and $32 million in 2015. These maturities consist mainly of $265 million of outstanding borrowings on the firm's secured revolver and required term loan amortization payments. As previously mentioned, Dean repaid the outstanding balance on its revolver and all term loans following the divestiture of Morningstar in January resulting in no significant maturities until 2016. Financial maintenance covenants in Dean's credit facility currently include maximum total and senior secured leverage ratios. The calculations exclude up to $100 million of unrestricted cash and adjust for charges and non-recurring items; therefore, bank leverage ratios are modestly lower than those calculated by Fitch. The total leverage covenant is currently 5.5x, stepping down to 5.25x on March 31, 2013 and 4.5x on Sept. 30, 2013. The senior secured leverage restriction of 3.75x steps down to 3.5x on March 31, 2013. Dean is also bound by a minimum interest coverage requirement of 2.75x which steps up to 3.0x on March 31, 2013. Dean reported total leverage and senior secured leverage, as calculated by its credit agreement, of 3.54x and 1.96x, respectively at Dec. 31, 2012, which indicates EBITDA cushion in excess of 30%. Rating Sensitivities: Future developments that may, individually or collectively, lead to a positive rating action include: --Total debt-to-operating EBITDA consistently near 2.5x or less, due to EBITDA materially above $450 million or stable-to-declining debt levels; --Good cash flow from operations and FCF generation; --The successful elimination of additional fixed costs, the absence of significant volume declines, and the maintenance of market share would also be required for future rating upgrades. Future developments that may, individually or collectively, lead to a negative rating action include: --Total debt-to-operating EBITDA sustained above 3.5x due to a material increase in debt or EBITDA meaningfully below $400 million for a prolonged period could trigger a downgrade in ratings; --Multiple years of negative FCF generation and an acceleration of volume declines could also result in negative rating actions. Contact: Primary Analyst Carla Norfleet Taylor, CFA Director +1-312-368-3195 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst Wesley E. Moultrie, II CPA Managing Director +1-312-368-3186 Committee Chairperson Mark A. Oline Managing Director +1-312-368-2073 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (Aug. 8, 2012); --'Fitch: Dean Foods' Ratings Not Immediately Affected by Agreement to Sell Morningstar' (Dec. 3, 2012); --'Fitch Upgrades Dean's IDR to 'B+'; Places on Rating Watch Positive' (05 Nov 2012); --'High-Yield Food, Beverage, Restaurant, and Consumer Products Handbook' (Sept. 19, 2012); --'Dean's Outlook Remains Positive on Proposed IPO/Spin-Off of WhiteWave' (Aug. 8, 2012). Applicable Criteria and Related Research High-Yield Food, Beverage, Restaurant, and Consumer Products Handbook here Corporate Rating Methodology here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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