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March 4 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned French packaged food company Labeyrie Fine Foods SAS (LFF) an expected Long-term issuer Default Rating (IDR) of ‘B(EXP)’ with Stable Outlook. Fitch has assigned LFF’s proposed EUR275m senior secured notes a ‘B+(EXP)'/‘RR3’ expected rating.
The final ratings are contingent on the proposed refinancing of LFF taking place and the final terms conforming with those already received. Failure to conduct the refinancing according to plan would result in the withdrawal of the ratings.
The expected ratings reflect LFF’s high business risk profile, somewhat compensated by a relatively conservative leverage structure and good free cash flow (FCF) generation capacity. While Fitch positively factors in the proven resilience of its sales and profitability as well as its leading brands positions, it also takes into account LFF’s small scale, high seasonality of sales and relatively low customer, products and geographic diversification.
Fitch believes these characteristics would exacerbate the effect of an external shock on revenues and profit. This risk is partially compensated by low leverage relative to Fitch-rated packaged food leveraged peers and its healthy, albeit low cash flow generation capacity, underpinned by steady profit generation and limited working capital and capex needs.
In Fitch’s view, an upgrade to ‘B+’ would only be possible if leverage was lower, to further increase financial flexibility in view of the high business risk, or there was greater scale and diversification of sales, leading to enhanced profit margins and higher FCF generation.
Resilient Business Model
LFF’s sales resilience reflects its niche positioning in the premium pleasure food market, which has proven highly stable through economic cycles. The group also benefits from the leading position of its core brands in the French market, underpinned by its high-quality image. The stability in profit margins through economic and commodity price cycles is essentially ensured by management’s adequate raw materials purchase strategy and its proven ability to pass cost increases on to its food retail customers, albeit with some delays. Fitch expects LFF’s EBITDA margin to remain at or be slightly above the FY13 level of 8.2% over the next few years despite prospects of increasing raw material prices and higher marketing investments.
Highly Seasonal Sales and Profit
High seasonality represents a significant business and financial risk, especially if coupled with an external shock. As LFF generates on average 41% and 66% of its sales and EBITDA respectively between October and December, if the company suffered a shock during the Christmas season it would leave limited margin for manoeuvre to catch up sales and profit shortage over the rest of the year. Therefore LFF could struggle to repay its short-term facilities due to inventories and account receivables piling up in consequence.
Limited Scale and Diversification
Compared with most of Fitch’s non-investment grade rated packaged food peers, LFF exhibits a small scale. Limited geographic (mostly mature France and UK), product categories (foie gras and smoked salmon made 59% of FY13 sales), and customer (top ten clients represented 74% of FY13 sales) diversification leads to high business risk. Diversification is all the more critical for protein producers, like LFF, as they can be exposed to food scares. For LFF this is only partially mitigated by the group’s high-quality image, presence across various food counters, and the fact its business units are run separately. LFF’s positive efforts at diversifying its geographies, customer base and products will only generate meaningful benefits in the long term as they are financially limited by its relatively low, albeit positive, cash generation capacity.
Compared with entities rated ‘B’ by Fitch we also positively factor the moderate leverage implied by the refinancing, with lease-adjusted FFO gross leverage expected at 5.0x at FYE14 against 5.2x at FYE13. Fitch views a moderately leveraged structure as necessary to compensate for LFF’s high business risk profile. From a cash generation perspective the higher interest payments implied by the bond issuance, in comparison with bank term loans, are compensated by the absence of amortising debt.
Good FCF Generation Capacity
LFF’s FCF generation will be reduced due to higher interest payments. However, it should remain positive at between 1% and 2% of sales per annum over the next four years thanks to low single-digit top-line growth and the EBITDA margin remaining resilient, limited working capital outflow due to continued tight management, and relatively low capex needs. This leaves a degree of financial flexibility for bolt-on acquisitions. With limited M&A activity, FCF generation should allow the company to deleverage below 4.0x by FY16 on a lease-adjusted net FFO basis, from 4.4x in FY13.
Senior Secured Notes’ Rating
The ‘B+(EXP)'/‘RR3’ senior secured notes’ rating indicates above average expected recoveries in the range of 51%-70%. The instrument rating takes into account a EUR35m revolving credit facility (RCF) ranking senior to the bonds in the payment waterfall and half of maximum amount available under a factoring line of EUR80m as average annual draw-down. Despite being non-recourse Fitch estimates the factoring line is of strategic interest, and therefore includes it as a super-senior claim. Driving the recovery expectations is a post-restructuring EBITDA approximately 25% below the group’s adjusted LTM June 213 EBITDA of EUR61.8m. This level reflects a hypothetical adverse scenario of a significant shock to the issuer’s profitability. Combined with an estimated going concern multiple of 6x enterprise value/EBITDA, this results in a more favourable valuation than Fitch’s alternative estimation of a liquidation scenario.
Positive: Future developments that could lead to positive rating actions include:
- EBITDAR margin above 10% on a sustained basis.
- FCF margin sustained above 5%.
- FFO adjusted gross leverage below 4.0x.
- FFO fixed charge coverage above 3.5x.
Negative: Future developments that could lead to a negative rating action include:
- EBITDAR margin below 7.5% on a sustained basis.
- Negative FCF margin.
- FFO adjusted gross leverage above 6.0x.
- FFO fixed charge coverage below 2.0x.
Streamlined Debt Structure
LFF’s refinancing exercise, which includes the reimbursement of LFF’s bank facilities as well as expensive convertible bonds, would lead to a simpler capital structure as the EUR275m high-yield bond would become the bulk of the debt.
Following the debt refinancing, Fitch expects LFF to benefit from comfortable liquidity. It would be underpinned by an adequate amount of short-term facilities to fund working capital needs, which include a EUR35m RCF and a EUR80m factoring line allowing cheap receivables financing. Liquidity would be further supported by positive FCF generation and the absence of scheduled debt repayments.