Dec 03 -
-- Fage International S.A. (Fage) is launching a $250 million tap to its existing $150 million senior unsecured notes due 2020. Proceeds will be used to pay down debt and fund investments in the U.S.
-- Given Fage’s reducing exposure to Greece and taking into account the notes’ amended documentation, we now believe that insolvency proceedings would likely take place in Luxembourg, which enables us to apply our recovery rating methodology.
-- We are affirming our ‘B’ issue rating on Fage’s 2020 unsecured notes and assigning a ‘4’ recovery rating.
Standard & Poor’s Ratings Services said today that it had affirmed its ‘B’ issue rating on the $400 million unsecured notes due 2020, issued by Luxembourg-based dairy company Fage International S.A. (Fage; B/Negative/--). At the same time, we assigned a recovery rating of ‘4’ to the notes, indicating our expectations of average (30%-50%) recovery for noteholders in an event of a payment default.
Fage is launching a $250 million tap to its existing $150 million senior unsecured notes due 2020. Proceeds of the proposed additional $250 million notes will be used to fully repay Fage’s 2015 notes (currently rated ‘B’) and all bank lines outstanding, and to fund investments, primarily a new factory in the U.S.
The additional 2020 notes will be co-issued by Fage and its U.S.-based subsidiary Fage USA Dairy Industry Inc. (Fage USA). The notes will be guaranteed by Fage Luxembourg Sarl (the parent company of Fage USA and Fage’s non-Greek European operations) and Fage Dairy Industry S.A. (Fage Greece). As at Sept. 30, 2012, we understand that the issuers and guarantors represent more than 90% of the group’s sales, EBITDA, and assets.
The recovery rating on the notes reflects the company’s fair valuation (particularly based on its strong brand and growing U.S. business), the relatively limited prior ranking liabilities (in the form of a $50 million secured revolving credit facility ) and a favorable center of main interest (COMI) in Luxembourg or the U.S. The recovery rating is constrained at ‘4’, however, by the operating pressures we see in the Greek business and the existence of some debt baskets in the notes’ documentation.
The documentation for the 2020 notes contains a series of covenants limiting Fage’s ability to raise debt, subject to a fixed-charge coverage incurrence covenant of 2.0x. The documentation also contains restrictions on the company’s ability to pay dividends, sell assets, or enter into mergers and acquisitions.
Fage plans to amend the documentation for the 2020 notes in connection with the offering. It is launching a consent solicitation to obtain the consent of more than 50% of the existing $150 million 2020 noteholders to the amendments. If fewer than 50% of existing noteholders consent, FAGE may launch a second consent solicitation, in which new noteholders may participate together with existing noteholders. In such a second consent solicitation, new noteholders will be deemed to have voted in favor of the amendments by virtue of purchasing the new notes.
We believe that Fage’s COMI would most likely be Luxembourg in the event of an insolvency proceeding, because:
-- Fage, which will co-issue the 2020 notes, is incorporated in Luxembourg;
-- As per the amended documentation of the 2020 notes, Fage will hold its board meetings, keep its corporate book, and run the administration of the company in Luxembourg; and
-- Fage now owns the group’s intellectual properties, notably including its trademarks and yogurt technologies.
However, we do not exclude the possibility of insolvency proceedings taking place in the U.S., where the group generated about 56% of revenues and 71% of EBITDA in the 12 months to Sept. 30, 2012, with these figures rapidly increasing. We view the Luxembourg and U.S. jurisdictions as rather favorable for creditors. However, Fage is exposed to multiple jurisdictions, with its production assets located in the U.S. and Greece, and its intangible assets in Luxembourg. We therefore believe that recovery prospects could be somewhat impaired.
Under our recovery rating methodology, we simulate a hypothetical payment default for Fage. Given our view of Fage’s strong brand, we value the company as a going concern. We calculate Fage’s stressed enterprise value at default using an EBITDA proxy. Under this hypothetical scenario, we calculate that Fage’s EBITDA at the point of default would likely total about EUR43 million. We use a 5.0x stressed EBITDA multiple to estimate a stressed enterprise value of about EUR215 million at default.
After deducting priority liabilities--including enforcement costs and Fage’s secured $50 million RCF, which we assume would be fully drawn at the hypothetical point of default--we calculate that recovery prospects for the existing and additional noteholders would be slightly below 50%. Given Fage’s multijurisdictional exposure and the existence of some debt baskets in the notes’ documentation, we believe that recovery prospects would fall in the 30%-50% range, resulting in a recovery rating of ‘4’.
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008