(The following statement was released by the rating agency)
FRANKFURT/LONDON, July 09 (Fitch) Fitch Ratings has assigned Findus PledgeCo S.a
r.l (Findus) a Long-term foreign currency Issuer Default Rating (IDR) of
'B-(EXP)' with a Stable Outlook. Fitch has also assigned expected ratings of
'B+(EXP)'/'RR2' to the proposed 5.5-year non call-2.5 senior secured notes of a
total equivalent of GBP410m to be issued in three tranches (GBP/EUR/SEK) by
Findus Bondco S.A., a direct subsidiary of Findus, and guaranteed on a senior
secured basis by Findus and certain subsidiaries.
The expected IDR factors in the changed capital structure following the planned
issue of the notes and also incorporates the creation of a new multi-currency of
equivalent GBP60m super senior revolving credit facility (RCF) borrowed by
Findus Loanco that matures six months prior to the bond maturity. Fitch would
likely resolve and confirm the expected rating status in line with the expected
rating following a successful implementation of the proposed capital structure.
Moreover, the notes' final rating is subject to a review of the final
documentation materially conforming to information already received by Fitch.
Findus' inability to procure long-term refinancing prior to current debt
maturities could result in negative rating action.
Proceeds from the proposed notes will be used to refinance existing legacy of
various senior term debt tranches in an aggregate amount of approximately
GBP405m, prior to the original maturities between 2013 and 2016. The notes will
benefit from guarantees of Findus and major subsidiaries representing
approximately 100% of Findus' consolidated EBITDA and approximately 90% of
Findus' assets and will be secured on a first ranking basis by a pledge over
Findus and certain other guarantors, including first-priority security interests
in the issuer's share capital and the guarantors (while enforcement proceeds are
first allocated to super senior ranking liabilities inter alia). Fitch points
out that the proposed notes allow for up to 50% of cumulative net income being
paid-out as dividends.
The super senior RCF in an amount of committed GBP60m plus the greater amount of
GBP100m and an amount equal to 110% consolidated EBITDA of presently not
committed super senior debt ranks ahead of the notes and its utilization is
subject to a covenant test. The resulting total amount of prior ranking debt is
permanent, as the existing super senior RCF can be replaced within the lifetime
of the notes. Additionally, certain super senior hedging liabilities rank ahead
of the notes at the level of the super senior RCF.
Moreover, the notes documentation includes financial covenants that allow for
Findus to re-leverage. The parent company may assume further debt provided that
a fixed-charge cover test of 2.0x is met. Secured debt ranking equal to the
notes may be incurred by the issuer of the notes if the consolidated senior
secured debt/EBITDA ratio is below 4.1x.
KEY RATING DRIVERS
The refinancing is aimed to replace and extend the group's amortising near-term
loan maturities with a 5.5 year bullet maturity. Funds from operations (FFO)
adjusted leverage at year-end 2013 and pro forma for the refinancing of above 7x
remains high while FFO/fixed charge cover is only at 1.6x but Fitch expects
leverage to improve gradually towards below 6x respectively with FFO fixed
charge cover of up to 2x by year-end 2016 in line with the assigned ratings.
Fitch has not treated any of the subordinated debt including Junior MidCo PEC,
Senior Midco notes, Tracker PEC and On-loan PEC instruments as debt due to their
equity alike characteristics, including either contractual or structural
subordination, the absence of security and/or material independent enforcement
rights, longer dated maturities, PIK for life.
Resilient Food Consumption but Limited Growth
Consumption of fast moving consumer goods is relatively resilient throughout the
economic cycle albeit growth in mature, developed markets is limited. Findus'
product innovation and effective marketing spend are key to ensure its product
offering remains relevant to consumers in the context of changing economic
conditions, consumer preferences, health concerns and fluctuations in food
prices. The horse-meat issue that emerged in early 2013 and directly affected
0.9% of Findus product sales appears to have had minimal impact on the Findus
brand and the group's overall financial performance so far.
Findus remains the market leader in its key markets of Norway, Sweden, Finland
and France with high market shares in branded frozen food although we expect
increasing private label penetration and competition from chilled food to
continue putting pressure on Findus group's profit margins. In Southern Europe,
revenue support spend will drive pricing pass through albeit with limited EBITDA
upside until 2014. Findus' UK business remains low margin. While opportunities
exist for management to extract further cost savings, intense competition in
frozen and sector overcapacity issues in chilled will hamper any meaningful
recovery in UK profitability. Cost savings, albeit limited, are expected to
remain the key driver of profit growth.
Volatility in Commodity Prices
Sudden commodity price inflation in conjunction with greater sourcing volatility
in food commodity markets will continue to challenge Findus. New management will
need to demonstrate how to effectively compete against larger and more
diversified branded players during periods of rising input costs through e.g.
price increases as part of product reformulations. Findus needs to demonstrate
its commitment to achieving a lean cost structure lending to greater profit
stability and margin expansion bringing it more in line with close peers.
Findus' liquidity is deemed adequate with an estimated GBP32m of cash and
marketable securities on balance sheet post refinancing and access to an
initially undrawn GBP60m (increased from GBP50m) super senior RCF. Moreover, the
group's expected generation of annual cash flow from operations (CFO) in between
GBP20m to GBP40m over the forecasted period should provide sufficient funding
for the group's operating needs including working capital requirements and
Future developments that could lead to positive rating actions include:
- Improvement in operating profitability and organic business growth evidenced
by EBITDA margin improvement up to 9% and free cash flow margin of 3% or higher.
- Further de-leveraging: FFO adjusted leverage to or below 5.5x on a sustained
- FFO fixed charge cover at 2x or above on a sustained basis.
Future developments that could lead to negative rating action include:
- Negative organic revenue growth combined with continued and permanent
reduction in operating profitability leading to EBITDA margin below 7%
- Consecutive periods of negative cash flow leading to erosion in liquidity
- A sustained deterioration in FFO adjusted leverage to or above 7x
- FFO fixed charge cover sustainably at 1.5x or below
- Inability to procure long-term refinancing ahead of the existing debt
Expected Recovery for Creditors upon Default
The senior secured notes' 'B+(EXP)'/'RR2' rating reflects Fitch's expectation of
superior recoveries in the range of 71%-90% in case of default. The instrument
rating is reflective of Findus' elevated FFO adjusted leverage above 7x and
takes into account a GBP60m super senior RCF inter alia effectively ranking
ahead of the bond. Driving these recovery expectations is an estimated post
restructuring EBITDA at approximately GBP83m reflecting a hypothetical adverse
scenario of depressed sales and compressed margins as a function of increased
competition and commodity price volatility. This in combination with an
estimated going concern multiple of 5x enterprise value/ EBITDA, results in a
more favourable valuation than the agency's alternative estimation of a
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Fitch Ratings Limited
30 North Colonnade
London E14 5GN
+ 49 69 7680 76125
Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email:
Additional information is available on www.fitchratings.com. For regulatory
purposes in various jurisdictions, the supervisory analyst named above is deemed
to be the primary analyst for this issuer; the principal analyst is deemed to be
Applicable criteria, 'Corporate Rating Methodology', dated 8 August, 2012,
'Evaluating Corporate Governance' dated 12 December, 2012 and 'Recovery Ratings
and Notching Criteria for Non-Financial Corporate Issuers' dated 13 November,
2012 are available at www.fitchratings.com.
Applicable Criteria and Related Research:
Corporate Rating Methodology
Evaluating Corporate Governance
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
Treatment of Junior Corporate Debt in Europe; European HoldCo PIK and
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