New York, January 04, 2013 -- Moody's Investors Service today lowered Dean Foods Company's ("Dean")
Corporate Family and Probability of Default Ratings to B1 from Ba3.
At the same time Moody's upgraded the rating for Dean's senior
secured credit facility to Ba2 from Ba3, while unsecured debt ratings
were confirmed at B2. The company's SGL-2 Speculative
Grade Liquidity rating remains unchanged. The rating outlook is
stable. The new ratings reflect Dean's business and financial
position post the completion of the planned spinoff of most of its remaining
interest in WhiteWave to shareholders, as well as the sale of Morningstar
which closed yesterday.
RATINGS RATIONALE
Dean Foods' B1 rating reflect its narrow pro-forma margins,
the commodity oriented nature of the fluid milk business, as well
as relatively high leverage despite significant debt paydown from IPO
and sale proceeds, more limited product, geographic and customer
diversification than several of its food and agriculture company peers,
and the potential for high earnings volatility due to fluctuating milk
prices and low pricing power. It also reflects certain challenges
facing the category including declining US milk consumption and dependence
on government farm policy as regards to milk subsidies. The rating
is supported by the company's leading market share, national scale
in the US dairy industry, and strong distribution network with comprehensive
refrigerated direct store delivery systems, all of which have allowed
Dean to gain market share versus competitors. The rating also reflects
the potential for further cost efficiencies/productivity improvements
as management focuses on internal integration, streamlining of operations
and further cost reduction initiatives.
Moody's expects that leverage will decline from historical levels
as the proceeds from the WhiteWave IPO and the Morningstar sale were used
to repay debt. However most of the pensions and leases will remain
with the Dean Foods business, and cash flows will be diminished
after the sale of the higher margin businesses. As a result,
leverage is likely to remain relatively high -- at close
to 4 times incorporating Moody's accounting adjustments --
over the next 12 to 18 months. Meanwhile, EBITA margins are
likely to hover in the low 4% range post spin and sale, at
least until planned costs savings can be achieved. Interest coverage
will remain modest due to the high cost of remaining unsecured debt,
only slighly improved from historical levels. All ratios are calculated
using Moody's accounting adjustments. While Dean continues
to benefit from strong qualitative elements such as its scale and national
leadership position in fluid milk, it is nevertheless a smaller
and less diversified company with less growth potential than before the
Whitewave/Morningstar transactions.
Moody's expects Dean to maintain good liquidity (as evidence by
its SGL-2) over the next 12-18 months, with ample
headroom under the bank covenants. Moody's also expects that
a combination of Dean's existing cash and as well as cash it can
internally generate near term will be sufficient to cover all basic cash
needs, including working capital and CapEx over the next four quarters.
Post the IPO and Sale of Morningstar, senior secured debt is substantially
reduced with the repayment all its secured term debt ( all of both the
A and B tranches) and the company faces no near term maturites.
The stable outlook reflects Moody's assumption that Dean will pursue
a more conservative financial policy than in the past, which is
appropriate given the lower margins, and more limited diversity
of the remaining business.
Ratings could be upgraded over time if Dean Foods can demonstrate that
it is able to sustain less volatility than it has in the past in its fluid
milk business, achieve greater cost efficiencies, permanently
reduce leverage below 3.5 times, and improve interest coverage.
A downgrade could result from declining cash flow, deterioration
in liquidity, volume declines that are not offset by pricing and
efficiency gains, leverage sustained above 5 times, or any
large debt funded shareholder returns or acquisitions.
The following ratings were downgraded:
- Corporate Family Rating to B1 from Ba3
- Probability of Default Rating to B1 from Ba3
The following rating was upgraded:
- Senior Secured Bank Credit facility to Ba2 (LGD 2, 23%)
from Ba3 (LGD 3, 42%)
The following ratings were confirmed:
- Senior Unsecured at B2 (LGD 5, 73%)
The principal methodology used in rating Dean Foods was Global Food -
Protein and Agriculture Industry Methodology (published September 2009)
and available on www.moodys.com in the Rating Methodologies
sub-directory under the Research & Ratings tab. Other
methodologies and factors that may have been considered in the process
of rating this issuer can also be found in the Rating Methodologies sub-directory
on Moody's website.
Dean Foods is the largest processor and distributor of milk and various
other dairy products in the United States. Headquartered in Dallas,
Texas, Dean Foods had sales of approximately $12.8
billion for the latest twelve months ending September 30, 2012,
but will have sales of closer to $9 billion after the spin-off
of WhiteWave and sale of Morningstar.
REGULATORY DISCLOSURES
The Global Scale Credit Ratings on this press release that are issued
by one of Moody's affiliates outside the EU are endorsed by Moody's
Investors Service Ltd., One Canada Square, Canary Wharf,
London E 14 5FA, UK, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that has issued a particular Credit Rating is available on www.moodys.com.
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Linda Montag
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Peter H. Abdill, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
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Moody's lowers Dean Foods CFR to B1; upgrades secured debt to Ba2 and confirms other debt ratings
