(The following was released by the rating agency)
Overview -- U.S.-based Pinnacle Foods Finance LLC (Pinnacle) is issuing a new $450 million term loan F due 2018 to partially refinance its non-extended term loan B and part of its 9.25% senior notes due 2015.
-- We affirmed Pinnacle's 'B' corporate credit rating and existing issue-level ratings.
-- We are assigning a 'B+' issue-level and '2' recovery ratings to the company's new term loan F.
-- The stable outlook reflects our expectation that Pinnacle will maintain leverage under 7x, EBITDA margins in the high teens, and adequate liquidity during the next year.
Rating Action
On Aug. 16, 2012, Standard & Poor's Ratings Services affirmed its existing ratings, including its 'B' corporate credit rating, on Parsippany, N.J.-based Pinnacle Foods Finance LLC. In addition, we assigned a 'B+' issue-level rating to the company's proposed new $450 million term loan F due 2018. The recovery rating for the facility is '2', indicating our expectation for substantial recovery (70% to 90%) in the event of a payment default. Our 'B+' issue level and '2' recovery ratings remain unchanged on the company's remaining senior secured debt. Our 'CCC+' and '6' recovery ratings remain unchanged on the company's outstanding senior unsecured notes. The outlook is stable.
We understand that proceeds of the proposed term loan F will partially refinance the company's existing term loan B and part of its 9.25% senor notes. We believe that this is a leverage neutral transaction. As of the quarter ended June 24, 2012, the company had roughly $2.6 billion in reported debt outstanding. Including our adjustment for operating leases and pension and benefit obligations, we estimate adjusted debt outstanding will be approximately $2.8 billion.
Rationale
The ratings on Pinnacle Foods Finance LLC reflect its 'highly leveraged' financial risk profile and 'fair' business risk profile (as defined in our criteria). Key credit factors considered in our fair business risk assessment include our view of Pinnacle's participation in the very competitive packaged foods industry and limited geographic diversity (mostly in North America), as well as Pinnacle's good market positions and diverse products.
Although the company reduced debt by about $112 million following its April 2012 refinancing transaction, we believe that Pinnacle's financial profile remains highly leveraged. For the 12 months ended June 24, 2012, leverage as measured by adjusted total debt to EBITDA was roughly 6.6x as compared with 6.4x at fiscal year end Dec. 25, 2011. For the 12 months ended June 24, 2012, we estimate funds from operations (FFO) to debt was roughly 8%, unchanged from year end. These ratios are in line with our highly leveraged indicative ratios of leverage greater than 5x and FFO to total debt of less than 12%. We expect Pinnacle to continue to improve its credit protection measures with continued deleveraging
Reported net sales for the six months ended June 24, 2012 declined by about 0.2%, reflecting a 2.8% decline in volume/mix, partially offset by higher net pricing. Adjusted EBITDA during the first half of the year declined by about 18% from the same prior-year period, largely due to higher commodity costs that were not fully offset by higher net pricing and productivity. We estimate adjusted EBITDA margin contracted for the 12 months ended June 24, 2012 to roughly 17%, as compared with about 18% at year end. Management estimates annualized savings of roughly $20 million beginning in 2012 from its manufacturing consolidation and has a supply chain productivity program in place that targets 3% to 4% annual savings in cost of goods. As a result of these cost savings, along with the benefits of carry-over pricing from 2011 to offset continued raw material inflation, we expect Pinnacle to improve its margins by year end closer to 18%.
We also expect Pinnacle to reduce debt leverage by year end with continued debt reduction and EBITDA improvement. Our base case scenario assumptions include:
-- Low-single-digit revenue growth, driven by carry-over pricing actions taken in 2011 and slight mix benefits from innovation. We assume minimal volume growth because we believe that elasticity will continue to pressure volumes across all food categories, limiting substantial volume increases.
-- We assume that the company will improve EBITDA margin to nearly 18% because pricing and cost reduction programs will offset elevated raw material costs.
-- Positive free operating cash flow after capital expenditures of at least $100 million with capital expenditures of roughly $80 million.
-- At least 50% of excess cash flow applied to debt reduction.
-- No dividends to shareholders.
Based on our forecast, we estimate that by the end of 2012, the company's credit protection measures will improve modestly, including leverage of approximately 6x, and FFO to total debt will increase modestly, yet credit protection measures will remain in line with our highly leveraged indicative ratios.
Pinnacle Foods manufactures and markets a diverse portfolio of national and regional branded foods. Pinnacle has limited geographic diversity, with the majority of its sales concentrated in North America. The company competes in about 12 major categories and maintains leading share positions within them. Some of the company's main brands include Birds Eye, Vlasic, Duncan Hines, Van de Kamps, and Mrs. Paul's. It is our opinion that the packaged foods industry is generally countercyclical and that it has benefited from consumers' return to home dining during a weak economy. Still, competition is strong in the industry, and several of Pinnacle Foods' regional and second-tier brands compete against larger, financially stronger global competitors, including ConAgra Foods Inc. (BBB/Stable/A-2) and Kraft Foods Inc. (BBB/Stable/A-2). We believe that private-label competition remains a threat to branded food companies, primarily in the frozen foods category, but that Pinnacle Foods' dry foods business is less susceptible to such competition.
Liquidity
We believe that Pinnacle Foods has 'adequate' (as defined in our criteria) sources of liquidity to cover its needs during the next 12 months. We expect that Pinnacle Foods' sources of liquidity during the next 12 months will exceed its uses by more than 1.2x and that net sources will be positive, even with a 20% drop in EBITDA. This is based on the following information and assumptions:
-- As of the quarter ended June 24, 2012, the company had roughly $23 million in cash.
-- The company will draw on its revolver for peak working capital needs during the third fiscal quarter, reflecting crop inventory build during the summer months and ahead of the key holiday selling season. As of June 24, 2012, the company had roughly $117 million available under its $150 million revolving credit facility that matures April 17, 2017.
-- We understand that the company is subject to a 5.25x net first-lien secured net leverage covenant. We expect the company to maintain at least a 15% EBITDA cushion.
-- Management forecasts capital expenditures of about $80 million in 2012, which we expect to be funded out of cash flow from operations.
-- Following this transaction, the company's nearest maturity will be the estimated $250 million remaining of the unextended term loan B in April 2014.
-- In our view, Pinnacle has sound relationships with its banks.
Recovery analysis
We assigned our 'B+' issue-level rating to the company's proposed term loan F and a '2' recovery rating, indicating our expectations for substantial recovery in the 70% to 90% range. Our issue-level ratings on the company's other senior secured facilities remain 'B+' with a '2' recovery. The company's senior unsecured notes are rated 'CCC+' with a '6' recovery, indicating our expectations for negligible (0% to 10%) recovery in the event of a payment default.
For the complete recovery analysis, please refer to our recovery report to be published following this report on RatingsDirect on the Global Credit Portal.
Outlook
The stable outlook reflects our expectation that Pinnacle will maintain leverage under 7x, EBITDA margins in the high teens, and adequate liquidity during the next year. We could raise the ratings if the company is able to reduce and sustain adjusted debt to EBITDA at less than 6x. We believe this could occur if the company restores EBITDA margins back to at least 18% driven by cost-saving initiatives while maintaining low-single-digit sales growth and reducing debt with free cash flow. Alternatively, we would consider lowering the ratings if debt leverage increases to well above 7x, or if liquidity weakens and the cushion on the company's leverage covenant falls to less than 10%. We estimate this could occur in a scenario in which revenues decline more than 5% and gross margins drop over 200 basis points from current levels.
Related Criteria And Research
-- Key Credit Factors: Criteria For Rating The Global Branded Nondurable Consumer Products Industry, April 28, 2011
-- Methodology And Assumptions: Standard & Poor's Standardizes Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- Corporate Ratings Criteria 2008, April 15, 2008
Ratings List
Ratings Affirmed
Pinnacle Foods Finance LLC
Pinnacle Foods Group LLC
Corporate Credit Rating B/Stable/--
Pinnacle Foods Finance LLC
Senior Secured B+
Recovery Rating 2
Senior Unsecured CCC+
Recovery Rating 6
Pinnacle Foods Finance LLC
Pinnacle Foods Finance Corp.
Senior Unsecured CCC+
Recovery Rating 6
New Rating
Pinnacle Foods Finance LLC
Senior Secured US$450 mil term F bank ln due B+
10/17/2018
Recovery Rating 2
Keywords: MARKETS RATINGS PINNACLEFOODSFINANCE
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