CHICAGO--(BUSINESS WIRE)--Fitch Ratings maintains the Rating Watch Positive on Dole Food Co., Inc. (Dole; NYSE DOLE) and Solvest Ltd. - Dole's wholly-owned subsidiary ratings as follows:
Dole (Operating Company)
--Long-term Issuer Default Rating (IDR) 'B+';
--Asset-based (ABL) revolver due 2016 'BB+/RR1';
--Secured term loan B due 2018 'BB+/RR1';
--13.875% third-lien notes due 2014 'BB/RR2';
--8% third-lien notes due 2016 'BB/RR2';
--8.75% senior unsecured notes due 2013 'B-/RR6'.
Solvest Ltd. (Bermuda-Based Subsidiary)
--Long-term IDR 'B+';
--Secured term loan C due 2018 'BB+/RR1'.
At Dec. 29, 2012, Dole had $1.7 billion of total debt.
Fitch placed the ratings of Dole and Solvest on Watch Rating on Sept. 19, 2012 following the firm's announcement regarding a definitive agreement to sell its worldwide packaged foods and Asia fresh produce business to ITOCHI Corp. (ITOCHU) for $1.685 billion in cash. ITOCHU will have exclusive rights to the Dole trademark on packaged food products worldwide and on fresh produce in Asia, Australia, and New Zealand, subject to certain exceptions.
Dole simultaneously announced that it would use the majority of the proceeds, net of about $300 million of cash cost associated with the transaction and subsequent restructuring, to pay off its existing debt. In connection with the divestiture and debt pay down, Dole indicated that it would recapitalize its balance sheet with any new debt issued on more favorable terms and being biased towards term loans.
Fitch's Rating Watches indicate a heightened probability of a rating change and the likely direction of such a change. They are typically event-driven and, as such, are generally resolved over a relatively short period. After a Rating Watch has been in place for six months, Fitch's policy is to review the Rating Watch every three months until it is resolved. Fitch will monitor any negotiations that may develop between Dole and Itochu and will resolve the Rating Watch when there is clarity regarding a potential transaction and the terms thereof.
KEY RATING DRIVERS:
The Positive Rating Watch indicates that there is heightened probability of an upgrade with the ultimate outcome dependent on Dole's post recapitalization capital structure and leverage. Dole expects the closing of the divestiture and confirmation of its final debt structure to occur on April 1, 2013, versus the firm's original expectation that closure would occur by the end of 2012. Board approval and customary regulatory approvals have been received. On Feb. 22, 2013, ITOCHU paid Dole a non-refundable cash deposit of $200 million to be applied towards the purchase price and the parties agreed that, with limited exceptions, the deposit would be forfeited and retained by Dole if the closing does not occur by April 1, 2013.
Fitch believes Dole will maintain materially lower debt levels as a smaller commodity produce company with volatile operating earnings and cash flow but views a debt-financed shareholder payout as a possibility. In early 2013, Dole announced that it was finalizing the written banking commitments for a new $400 million term loan and a $300 million revolving credit facility, to be implemented upon completion of the sale transaction.
However, Dole continues to assess its capital structure and at this time plans to confirm final debt levels concurrent with the closing of the divestiture of its worldwide packaged foods and Asia fresh businesses on April 1. Dole has not committed to a new leverage goal but prior to its strategic business review and definitive agreement with ITOCHU, the firm's financial strategy was to utilize free cash flow (FCF) and asset sale proceeds to pay down debt, engage in select tuck-in acquisitions, and reduce net debt-to-EBITDA to 2.0x.
Upon resolution of the Positive Watch, Dole's ratings will continue to reflect its mid-single digit margins and the periodic volatility of its remaining fresh produce operations in North America, Latin America, Europe and Africa. Ratings will also incorporate Fitch's view of normalized or average EBITDA, future FCF generation, and the fact that Dole is less diversified. Dole's operating earnings and cash flow should benefit from reduced overhead and operational costs associated with a smaller more streamlined organization and lower interest expense due to reduced debt levels.
Pro forma for the divestiture, Dole will have approximately $4.2 billion revenue with nearly 75% or about $3.2 billion from fresh fruit and about 25% or $1 billion from fresh vegetables. For 2013, Dole expects consolidated EBITDA for these operations to approximate the low end of its $150 million - $170 million guidance due mainly to competitive pricing in North American bananas which according to the company has resulted in a small loss of market share. Dole also intends to spend $170 million in capital expenditures during 2013 as it strategically invests in its farm assets and expand its port in Ecuador.
Fitch currently views normalized EBITDA for new Dole to be in the $200 million - $250 million range but realizes it may take more than a year for earnings to reach this level. Fitch also believes Dole can generate modest FCF in most years. This belief is based on assumptions regarding normalized EBITDA, cash taxes in the 20% range, meaningfully reduced cash interest expense due to lower debt levels, and a normal capital expenditure run rate of $60 million - $70 million. Most of Dole's earnings and cash flow is generated in the first half of the year.
Dole expects to realize $20 million of sustainable cost savings in 2013 and is developing other initiatives and operational programs to capture additional future savings. The company is also targeting $175 million - $200 million of proceeds from the marketing of approximately 20,600 acres of non-core Hawaiian land not currently being farmed. Funds, which will be received over the next few years, are expected to be reinvested in its business. Following these asset sales, Dole will continue to maintain a substantial asset base of farm land, manufacturing facilities, ships, containers, ports, and other buildings.
Credit Statistics, Liquidity and Maturities:
For the latest 12-month (LTM) period ended Dec. 29, 2012, comparable total debt-to-operating EBITDA inclusive of the $188 million of EBITDA generated by Dole's businesses being sold to ITOCHU during 2011 has been estimated at 4.7x, in line with levels from Dec. 31, 2011. FCF from continuing operations was negative $60.5 million versus negative $77.1 million for the year ended Dec. 31, 2011.
At Dec. 29, 2012, Dole's liquidity consisted of $91.6 million of cash and $117.1 million of availability under its $350 million revolving ABL facility expiring July 8, 2016. ABL availability reflects a borrowing base of $331.3 million, $95 million of letters of credit, and a $119.2 million of outstanding balance. Dole's only financial covenant for its credit facilities is a springing fixed charge coverage ratio of at least 1.0x if ABL availability is below a certain amount.
Dole's debt agreements contain mandatory prepayment requirements related to asset sales. At Dec. 29, 2012, Dole had $155 million of 8.75% senior unsecured notes due July 2013, $174.9 million of 13.875% junior-lien notes due March 2014, $315 million of 8% of junior-lien notes due September 2016, and a $311 million term B loan due July 2018. Solvest's $556.6 million term C loan is due July 2018.
Dole's existing ABL has a first-priority lien on U.S. account receivables and inventory and a second-priority lien on real and intangible property. Term loans are secured on a first priority basis by real and intangible property and on a second priority basis by ABL collateral. Lastly, third-lien notes have the benefit of a lien on certain U.S. assets of Dole that is junior to the liens of the company's senior secured credit facilities.
RATING SENSITIVITIES:
Future developments that may, individually or collectively, lead to a positive rating action include:
--The closure of Dole's asset sale transaction, the subsequent payoff of existing debt, and more certainty as to Dole's capital structure following the recapitalization of its debt structure is expected to result in rating upgrade(s). However, continued loss of market share due to competitive pricing in North American bananas would be viewed negatively.
Future developments that may, individually or collectively, lead to a negative rating action include:
--A downgrade is not anticipated as Fitch expects Dole to maintain a materially lower debt level following its recapitalization.
Additional information is available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Recovery Ratings and Notching Criteria for Non-financial Corporate Issuers' (Aug. 14 2012);
--'Fitch Changes Dole's Rating Watch to Positive on Planned Debt Reduction' (Sept.19, 2012).
Applicable Criteria and Related Research
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=693773
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