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19 Apr 1996
MOODY'S ASSIGNS B1 TO AMENDED BANK AGREEMENT AND B3 TO PROPOSED SUBORDINATED DEBT OF FOODBRANDS AMERICA, INC.
New York, 04-19-96 -- Moody's Investors Service assigned a B1 to the amended $320 million senior secured bank credit facilities and a B3 to the proposed subordinated notes, due 2006, of Foodbrands America, Inc. The existing bank and subordinated debt ratings will be withdrawn upon the conclusion of this refinancing.
The ratings reflect Foodbrand's weak balance sheet, with very high debt and negative tangible equity; its poor earnings history; and its aggressive acquisition strategy. The ratings also reflect the highly competitive business environment further exacerbated by the company's customer concentration and susceptibility to raw material price movements. These risks are mitigated by the company's ongoing efforts to restructure its business and to place greater emphasis on higher-margin value-added products in the foodservice segment, and its willingness to employ equity to fund growth. The individual ratings reflect the relative rankings of the securities within the capitalization structure.
The transformation of Foodbrands over the past two years has been dramatic. The company acquired the specialty frozen business of International Multifoods in June 1994, KPR and TNT in December 1995, and divested its low margin retail division in May 1995. There were also management changes, a company name change, and a new listing on the New York Stock Exchange. All of these events reflect a shift in the strategic thrust of the company: to become a broad-based food company and move away from the more volatile commodity business. This strategy enables the company to expand its product offering beyond its traditional pizza toppings, thereby strengthening its customer relationships.
While the transformation is laudable, it has not been achieved without its costs. Moody's notes the substantial negative retained earnings caused by years of losses and further weakened by the charges incurred in the implementation of the strategy. Although the acquisitions and divestiture have been accretive to earnings, the overall business continues to generate thin margins, a reflection of the competitive landscape. Furthermore, the company remains susceptible to the customers' stronger bargaining position.
The current transactions are designed to increase financial flexibility and to better poise Foodbrands in implementing its acquisition strategy. The new subordinated issue extends the maturity by six years, while the tenor of a portion of the amended bank agreement moves from 4.5 years to 7 years. The bank facilities are composed of three tranches of debt under one agreement: a $75 million revolver, due 2000; a $45 million term loan facility, due 2000; a $100 million supplemental term facility, due 2003; and a $100 million reducing acquisition financing facility, due 2000. The agreement continues to be guaranteed and secured by the stock of subsidiaries and substantially all of the tangible and intangible assets of the company.
The B1 bank debt rating recognizes the improving credit profile of the company and the superior position of the bank lenders in both ranking and security. However, the security benefit is tempered by the perishible nature of the inventory, tangible assets that approximate bank debt outstanding, and the substantial payables and accruals.
Moody's expects that Foodbrands will continue its aggressive acquisition program. However, twice in the past the company has used equity to help fund growth, and has stated its desire to maintain a more balanced capital structure. Our ratings take into consideration the likelihood that future acquisitions will involve additional equity, so as to not upset the current leverage (debt to book capitalization of almost 90%). At the same time, Moody's does not anticipate any meaningful near term debt reduction either since excess cash flow will likely be used to fund growth.
Foodbrands America, Inc. (formerly Doskocil Companies, Inc.), based in Oklahoma City, OK, is a major processor and marketer of meat-based and other perishable food products in the U.S.
No Related Data.
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