Dec 10 - Standard & Poor's Ratings Services' today assigned ratings to
Minnetonka, Minn.-based Michael Foods Group Inc.'s proposed $275 million senior
unsecured payment-in-kind (PIK) toggle notes due 2018, issued under Rule 144A
without registration rights. The notes will be issued by Michael Foods Holding
Inc., parent company of Michael Foods Group. We rated the PIK toggle notes
'CCC+' (two notches below our 'B' corporate credit rating on Michael Foods
Group) with a recovery rating of '6', indicating expectations for negligible (0%
to 10%) recovery in the event of a payment default. (For the recovery analysis,
see Standard & Poor's recovery
report on Michael Foods, to be published on RatingsDirect following the
release of this report.)
Michael Foods has indicated that it will use proceeds from the proposed note
offering along with balance sheet cash to fund a $317 million dividend to its
sponsors, GS Capital Partners and TH Lee Partners. The notes will not be
guaranteed by any of the issuer's subsidiaries and will be structurally
subordinated to the existing senior secured credit facilities and existing
senior notes of Michael Foods Group. As of Sept. 29, 2012, Michael Foods had
about $1.27 billion of debt outstanding.
The 'B' corporate credit rating on Michael Foods Group Inc. reflects our view
of the company's financial risk profile as "highly leveraged" and its business
risk profile as "weak." Key credit factors in our business risk assessment
include our view of the company's exposure to volatile commodity costs,
product concentration, and participation in highly competitive segments with
larger competitors. Michael Foods Group benefits from its strong market
position in its core egg products business and a growing value-added product
We view the company's financial profile as highly leveraged based on its
significant debt burden and very aggressive financial policy. Credit
protection measures will weaken following the issuance of the proposed notes.
For the 12 months ended Sept. 29, 2012, we estimate pro forma total debt to
adjusted EBITDA will be high at 6.4x, as compared with 5.2x excluding the new
notes. We estimate the ratio of pro forma funds from operations (FFO) to total
debt will decline to 7.9% for the 12 months ended Sept. 29, 2012, from 9.6%
excluding the new notes. We expect credit measures will improve modestly over
the next year as the company applies free cash flow towards debt reduction.
These credit measures are in line with our "highly leveraged" indicative
ratios of leverage over 5x and FFO to total debt below 12%.
Related Criteria And Research
-- Summary: Michael Foods Group Inc., Oct. 29, 2012
-- Key Credit Factors: Criteria For Rating The Global Branded Nondurable
Consumer Products Industry, April 28, 2011
-- Criteria Guidelines For Recovery Ratings On Global Industrial Issuers'
Speculative Grade Debt, Aug. 10 2009
Michael Foods Group Inc.
Corporate credit rating B/Stable/--
Michael Foods Holdings Inc.
$275 mil. PIK toggle notes due 2018 CCC+
Recovery rating 6
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