Nov 5 - Fitch Ratings has upgraded the secured bank credit facility and
senior unsecured debt ratings of Dean Foods Company (Dean; NYSE: DF) and
the senior unsecured debt rating of Dean Holding Company as follows:
Dean Foods Company (Parent)
--Issuer Default Rating (IDR) to 'B+' from 'B';
--Secured bank credit facility to 'BB+/RR1' from 'BB/RR1';
--Senior unsecured debt to 'BB-/RR3' from 'B-/RR5'.
Dean Holding Company (Operating Subsidiary)
--IDR to 'B+' from 'B';
--Senior unsecured debt to 'BB-/RR3' from 'B-/RR5'.
Fitch has also placed the ratings on Rating Watch Positive.
At June 30, 2012, Dean had $3.6 billion of total debt, down from $3.8 billion at
March 31, 2012.
The upgrade and Positive Rating Watch are due to Dean's focus on debt reduction
and Fitch's view that further deleveraging is possible following the spin-off of
The WhiteWave Food Co. (NYSE: WWAV) and potential divestiture of Morningstar.
Increased profitability at Dean's Fresh Dairy Direct (FDD) operation, which is
comprised mostly of fluid milk, has also contributed to improvement in the
firm's credit profile. While raw milk costs have increased because of the recent
spike in corn prices, Fitch believes this inflation can be partially offset by
price realization, operating efficiency, and relative volume performance.
During 2011, FDD represented 74% of Dean's $13.1 billion of sales and 54% of its
$645 million of operating income excluding corporate expenses. WhiteWave-Alpro
represented 16% of sales and 31% of operating income excluding corporate
expenses, and Morningstar represented the remaining 10% and 15%, respectively.
On Oct. 31, 2012, $282 million of net proceeds from the IPO of a 13% ownership
stake in WWAV together with approximately $885 million of borrowings under
WWAV's $1.35 billion secured credit facilities funded a $1.2 billion
distribution to Dean through the repayment of an inter-company note. Dean used
the proceeds from WWAV to repay all outstanding loans under its term loans due
April 2, 2014. Dean intends to affect a tax-free spin-off of all or a portion of
its approximate 87% ownership interest in WWAV no earlier than the expiration of
the 180-day lockup period following the closing of the IPO. Until the spin-off,
Dean will still consolidate WWAV. According to an Oct. 17, 2012 S-1 filing, WWAV
generated $2.0 billion of sales and $236.6 million of EBITDA during 2011.
On Sept. 26, 2012, Dean announced that it was exploring the sale of its
Morningstar business. Morningstar produces and sells items such as cultured
dairy products, ice cream mixes, coffee creamers, aerosol whipped toppings, and
blended iced beverages to retailers and foodservice providers nationwide. During
2011, Morningstar generated approximately $1.3 billion of sales and $122 million
of EBITDA. Fitch believes Dean could sell this business at 6x to 8x EBITDA
resulting in significant additional cash that might be used for debt reduction.
Pro forma leverage and FCF expectations following the spin-off of WhiteWave and
potential divestiture of Morningstar are fundamental to Fitch's analysis. Fitch
anticipates that Dean will generate approximately $10 billion of annualized
sales, $500 million of EBITDA and could have less than $1.5 billion of total
debt as a pure play traditional dairy business. Fitch also expects Dean's
traditional dairy business FCF generation to exceed $100 million annually as
interest expense declines and capital expenditures are reduced to reflect the
needs of its standalone FDD operations.
Dean's ratings consider FDD's mid-single digit operating margin, volatile
earnings profile, excess milk processing capacity for the industry, and gradual
declines in category volumes. These negatives are balanced against Dean's
conservative financial policies along with its market share leadership and
national direct store delivery capabilities, which Fitch views as competitive
For the LTM period ended June 30, 2012, total debt-to-operating EBITDA was 4.1x,
down from 5.3x at Dec. 31, 2010, and operating EBITDA-to-gross interest expense
was 3.6x, up from 3.1x. LTM FCF was $206.1 million, modestly lower than the
company's $263 million annual average over the past five years, excluding the
debt-financed $15/share special dividend in 2007.
In August 2012, Dean expected its leverage ratio, as defined by its credit
agreements, to decline to approximately 3.5 times (x) if WWAV's IPO and debt
raise closed by the end of 2012. Fitch believes total debt-to-operating EBITDA
can approximate 3.0x following the spin-off of WWAV and divestiture of
The 'BB+/RR1' rating on Dean's secured debt reflects Fitch's view that recovery
prospects for these obligations would be outstanding at 91% - 100% if the firm
filed for bankruptcy. The debt is secured by a perfected interest in
substantially all of Dean's assets. The 'BB-/RR3' unsecured rating is due to
Fitch's opinion that bondholder recovery would be good at 51% - 70% in a
distressed situation. Recovery prospects for unsecured bondholders could improve
further following the spin-off of WhiteWave and potential additional debt
reduction with the proceeds from the sale of Morningstar.
Liquidity, Maturities, and Financial Covenants:
Fitch views Dean's liquidity as adequate. At June 30, 2012, the firm had $60.4
million of cash, $1.2 billion available under its secured revolver, and $185
million under its receivables-backed facility. Dean's $1.3 billion revolver
expires April 2, 2014 and its $600 million on-balance sheet receivables-backed
facility matures on Sept. 25, 2013. Dean voluntarily reduced the size of its
revolver to $1 billion on Oct. 31, 2012.
Scheduled maturities of long-term debt at June 30, 2012 were $103.5 million in
2012, $376.2 million in 2013, and $1 billion in 2014. These maturities consisted
mainly of term loans and balances outstanding under the revolver and
Financial maintenance covenants in Dean's credit facility currently include
maximum total and senior secured leverage ratios. The calculation excludes up to
$100 million of unrestricted cash and adjusts for charges and non-recurring
items therefore bank leverage ratios are modestly lower than those calculated by
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 3.96x and 2.79x, respectively at June 30, 2012, which
indicates EBITDA cushion in excess of 20%.
What Could Trigger A Rating Action
Future developments that may, individually or collectively, lead to a positive
rating action include:
--Total debt-to-operating EBITDA in the mid-3.0x range or lower and continued
good FCF generation post the spin-off of WWAV and divestiture of Morningstar
could result in additional upgrades;
--Continued structural improvement in Dean's FDD business and a rational
wholesale pricing environment are also critical factors surrounding future
Future developments that may, individually or collectively, lead to a negative
rating action include:
--A sustained period of materially higher than expected leverage; such that
total debt-to-operating EBITDA consistently exceeds 4.5x, could trigger a
downgrade in Dean's existing ratings;
--Negative FCF generation, additional step downs in FDD's profitability due to
lower gross profit and/or wholesale pricing concessions could influence future
downgrades in ratings.