Overview -- Greece-based dairy manufacturer Fage Dairy Industry S.A. has changed its domicile to Luxembourg (AAA/Negative/A-1+) and renamed itself FAGE International S.A. (Fage). -- At the same time, revenues and EBITDA coming from Greece continue to decline as Fage's U.S. operations are rapidly growing. -- We are affirming our 'B' long-term corporate credit rating on Fage. -- The negative outlook reflects our view that we could still lower the rating on Fage if Greece leaves the eurozone, which we believe could result in severe and prolonged disruptions of Fage's activities in Greece, where about 50% of its assets are located. Rating Action On Oct. 9, 2012, Standard & Poor's Ratings Services affirmed its 'B' long-term issue and corporate credit rating on Luxembourg-incorporated FAGE International S.A. (Fage; previously Greece-incorporated Fage Dairy Industry S.A.). The outlook is negative. We have removed all ratings from CreditWatch where we had originally placed them on June 8, 2012. Rationale The affirmation reflects our view that Fage's new corporate structure and its growing U.S. business has reduced the group's exposure to Greece--Fage now generates more than two-thirds of its revenues outside Greece. Nonetheless, we still believe there are risks to the company's business should Greece leave the eurozone, and we continue to estimate there is at least a one in three chance of a Greek exit. We understand that about 50% of Fage's revenues are generated by assets located in Greece, and thus believe a Greek exit could still lead to severe and prolonged disruptions of Fage's Greek operations, which could require significant working capital. We view Fage's recently announced corporate restructuring, which primarily consists of a change of domicile from Greece (CCC/Negative/C) to Luxembourg (AAA/Negative/A-1+), as positive from a credit standpoint. We now believe that the risks linked to being a Greek incorporated company--including potential reduced access to capital markets, and legal uncertainties--have been addressed. At the same time, we believe that Fage will continue to grow its U.S. operations, which should more than offset the persistent deterioration of its Greek activities. Therefore we project that Fage will further reduce its exposure to Greece, where the company currently generates about 30% of its sales. On this basis, we project that Fage should be able to maintain leverage below 5x and an adequate liquidity position despite potential further deterioration in its Greek operations, thanks to our anticipation of a continuous strong dynamism of its U.S. Greek yogurt activities. However, Fage still has about 50% of its assets located in Greece, serving the Greek, the Italian, and the U.K. markets. We believe a Greek exit from the eurozone could lead to meaningful disruptions, principally related to the production and distribution of Fage's products in these markets. Although we understand that Fage has already reduced its exposure to the weakest local distributors in Greece, we believe that there is a risk of production interruptions and of significant payment delays in Greece, which could require significant working capital. We believe that Fage could withstand temporary disturbance thanks to its adequate liquidity position (namely EUR33 million of cash on balance sheet, and a committed $50 million revolving credit facility (RCF) mostly undrawn at the end of June 2012; and the absence of any material debt maturities before 2015). However, we believe that Fage may encounter difficulties withstanding potential severe and prolonged disruptions that could result from a disorderly exit of Greece from the eurozone, since Fage's fast-growing U.S. activities also require investments in working capital and in capacity expansion. Liquidity Fage's liquidity is "adequate," according to our criteria. We estimate that the company's sources of cash will exceed uses by more than 1.2x over the next 12 months. We anticipate the following sources of liquidity as of June 30, 2012: -- Cash balances of EUR33 million, primarily located in the U.S. and in Luxembourg; -- Forecast annual funds from operations of about EUR35 million; and -- A $50 million RCF expiring in 2016. We anticipate the following uses of liquidity as of the same date: -- Short-term borrowings of EUR28 million; -- Annual capital expenditures of around EUR15 million in 2012; and -- Moderately negative working capital outflows of about EUR10 million, due to some potential payment delay in Greece and revenue growth in the U.S. Fage's next significant debt maturities are not until January 2015 (EUR101.5 million) and February 2020 ($150 million), which further supports the "adequate" liquidity position. We note that the only financial covenant on Fage's RCF is a springing 1.1x fixed-charge coverage ratio. It would only be triggered if the RCF's availability dropped below the greater of 15% of its maximum availability and $5 million. This covenant is not currently in effect because the RCF has availability in excess of this minimum. Outlook The negative outlook reflects our view that we could lower the rating on Fage if Greece leaves the eurozone, which could result in severe and prolonged disruptions of Fage's activities in Greece, where about 50% of its assets are located. Under such a scenario, we believe working capital requirements could rise meaningfully, leading to higher short-term borrowings, which could lead to Fage's liquidity moving outside the adequate territory, and/or to debt leverage increasing to above 5x. We could revise the outlook on Fage to stable if we believed that the risk of Greece leaving the eurozone had declined or if Fage continued to meaningfully lower its exposure to Greece, which could take the form of a different mix of asset locations. Related Criteria And Research -- 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: Ratios And Adjustments, April 15, 2008 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List CreditWatch/Outlook Action To From Fage Dairy Industry S.A. Corporate Credit Rating B/Negative/-- B/Watch Neg/-- Senior Unsecured B B/Watch Neg Fage USA Dairy Industry Inc. Senior Unsecured B B/Watch Neg Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.