CHICAGO--(BUSINESS WIRE)--Fitch Ratings has downgraded the Issuer Default Ratings (IDRs) of Del Monte Foods Company (Del Monte; NYSE:DLM) and its wholly-owned operating subsidiary Del Monte Corporation as follows:
Del Monte Foods Company (Borrower/Issuer)
--Long-term IDR
downgraded to 'B' from 'B+'.
Del Monte Corporation (Operating Subsidiary)
--Long-term IDR
downgraded to 'B' from 'B+'.
Fitch has also assigned new ratings to the company's proposed $3.25 billion of secured credit facilities and offering of up to $1.6 billion senior unsecured notes, as follows:
Del Monte Foods Company (Borrower/Issuer)
--$750 million
asset-based loan (ABL) revolver at 'BB/RR1';
--$2.5 billion term
loan B at 'BB/RR1';
--Up to $1.6 billion senior unsecured notes at
'B-/RR5'.
Finally, Fitch has affirmed the following ratings on Del Monte Corporation's existing senior secured bank facility and senior subordinated notes. These ratings will be withdrawn once the proposed credit agreement and debt issuance close and the subordinated note tender offers discussed below are completed.
Del Monte Corporation (Operating Subsidiary)
--Senior secured bank
facility at 'BB+';
--Senior subordinated notes at 'B'.
The Rating Outlook is Positive.
These actions resolve the Negative Rating Watch Fitch placed on Del Monte's ratings on Nov. 30, 2010 following the company's announcement that it had signed a definitive agreement to be acquired by Kohlberg Kravis Roberts & Co. (KKR), Vestar Capital Partners (Vestar) and Centerview Partners (Centerview) for approximately $5.3 billion, excluding fees and expenses. Fitch downgraded Del Monte's IDR to 'B+' from 'BB+', secured ratings to 'BB+' from 'BBB-' and subordinated debt rating to 'B' from 'BB' to reflect Fitch's expectation that the credit quality of this debt would not remain as high once Del Monte became a more leveraged entity.
Fitch anticipates that the buy-out, which is scheduled to close during the first calendar quarter of 2011, will be roughly 70% debt/30% equity financed excluding fees and expenses. Total debt is expected to include a seven-year $2.5 billion secured term loan and up to $1.6 billion of senior unsecured notes. Del Monte's new capital structure will also include a 5-year $750 million ABL.
The ABL will have a first-priority lien on accounts receivable, inventory and cash (ABL Priority Collateral) while the secured term loan will have a first-priority lien on substantially all other assets and a second-priority lien on ABL Priority Collateral. All debt is expected to be guaranteed by substantially all domestic operating subsidiaries. Credit facility terms are expected to include a springing fixed-charge coverage ratio along with standard debt-incurrence-based covenants.
In connection with the proposed buy-out, Del Monte's new owners commenced cash tender offers, and corresponding consent solicitations, for any and all of Del Monte's existing senior subordinated notes, including its $250 million 6.75% and $450 million 7.5% tranches due Feb. 15, 2015 and Oct. 15, 2019, respectively. Given the total consideration for the tender, which includes a consent payment, Fitch anticipates 100% bondholder participation. The consent payment deadline is Feb. 1, 2011 and the tender offer expiration date is Feb. 16, 2011.
The downgrade of Del Monte's IDRs is due to the significant increase in financial leverage and annualized interest expense following the buy-out. Total debt will increase to approximately $4.1 billion from $1.5 billion at Oct. 31, 2010 and gross interest expense is expected to exceed more than $250 million annually, up from $116 million during fiscal 2010. Based on latest 12-month (LTM) Operating EBITDA of $611.6 million, as calculated by Fitch, pro forma total debt-to-operating EBITDA is 6.7 times (x) while pro forma operating EBITDA-to-gross interest expense could approximate 2.4x.
The Positive Outlook reflects Fitch's view regarding Del Monte's future ability to de-lever its balance sheet, given its annual free cash flow (FCF) (defined as cash flow from operations less capital expenditures and dividends) generation, relatively high EBITDA margins, and leading No. 1 and No. 2 U.S. market share positions in the processed produce and many of the pet food and pet snack categories in which it competes. For the year ended May 2, 2010, the company's Consumer Products segment represented 53% of sales and 39% of operating income while its Pet Products segment represented 47% of sales and 61% of operating income. Fitch does not expect Del Monte's operating strategy, which has focused on accelerating growth with higher margin pet products and packaged produce, to change as a result of the buy-out.
Furthermore, for the LTM period ended Oct. 31, 2010, Del Monte generated $214.7 million of FCF and had an operating EBITDA margin of 16.5%. Despite significantly higher projected interest expense and the expectation that inflationary cost pressures will grow in fiscal 2012, Fitch believes on-going productivity savings and additional cost savings accruing from the buy-out by KKR, Vestar and Centerview will mitigate potential margin compression.
According to Fitch's modeling, Del Monte has the capacity to generate normalized FCF in the $100 million-$150 million range and to maintain adequate liquidity following its buy-out. Should FCF be utilized for debt reduction, as Fitch expects, total debt-to-operating EBITDA could decline to below 6.0x within 18-24 months of the transaction. Leverage below 6.0x along with relatively stable margins and continued meaningful FCF generation could result in future rating upgrades.
The 'RR1' Recovery Rating on Del Monte's $3.25 billion of proposed secured debt indicates that Fitch views recovery prospects on these obligations as outstanding at 91% or better. The 'RR5' rating assigned to the company's senior unsecured notes denotes below-average recovery in the 11%-30% range if the bonds went into default. However, Fitch recognizes that recovery could be higher given the historical stability of Del Monte's cash flow and the strength of its position in the higher margin fast growing pet food/snack category for which it competes.
Additional information is available at www.fitchratings.com.
Applicable criteria and related research:
--Corporate Rating
Methodology (Aug. 16, 2010);
--Rating Packaged Food Companies -
Sector Credit Factors (May 11, 2010).
Related Research:
--'Fitch Downgrades Del Monte's IDR to 'B+' on
Buy-out; Negative Watch' (Nov. 30, 2010).
Applicable Criteria and Related Research:
Corporate Rating
Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646
Rating
Packaged Food Companies - Sector Credit Factors
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=526525
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