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Rating Action:

MOODY'S ASSIGNS Ba1 TO DEAN FOODS SR SECURED CREDIT FACILITIES, AFFIRMS Ba1 SR IMPLIED, Ba2 SR UNSECURED NOTES, SGL-1; OUTLOOK STABLE

28 Jul 2004
MOODY'S ASSIGNS Ba1 TO DEAN FOODS SR SECURED CREDIT FACILITIES, AFFIRMS Ba1 SR IMPLIED, Ba2 SR UNSECURED NOTES, SGL-1; OUTLOOK STABLE

Approximately $3.7 Billion of Credit Facilities and Debt Securities Affected

New York, July 28, 2004 -- Moody's Investors Service assigned a Ba1 rating to the new credit facilities of Dean Foods Company (Dean). Moody's also affirmed Dean's Ba1 senior implied rating, the company's SGL-1 liquidity rating, and the Ba2 rating on the senior unsecured notes of Dean Holding Company. The ratings outlook is stable.

Dean's relatively stable earnings base, scale, and national market dominance in the U.S. dairy industry support its ratings. Dean also has operated at lower leverage levels since conversion of $600 million of trust preferred securities to common equity, completed in mid-2003. The ratings, however, also take into account the company's heavy ongoing investment in the business and potential for continuing acquisition activity.

Over time, if Dean continues to operate at lower leverage levels while investing in growth opportunities and moves to a predominantly unsecured debt structure, the ratings could be upgraded. The current ratings would accomodate moderate acquisition and share repurchase activity, but the ratings could become pressured if Dean decides to increase leverage materially to fund acquisitions, share repurchases and/or heavier investments in its business platform and brand development.

Dean's ratings are:

Dean Foods Company

i) $1.0 billion Senior Secured Revolving Credit, maturing 2009 -- Ba1 assigned,

ii) $1.25 billion Senior Secured Term Loan A, maturing 2009 -- Ba1 assigned,

iii) $750 million Senior Secured Term Loan B, maturing 2011 -- Ba1 assigned,

iv) Speculative Grade Liquidity Rating -- SGL-1 affirmed,

v) Senior implied rating -- Ba1 affirmed,

vi) Unsecured issuer rating -- Ba2 affirmed.

Dean Holding Company

i) $100 million 6.75% Senior Unsecured Notes, due 2005 -- Ba2 affirmed,

ii) $250 million 8.15% Senior Unsecured Notes, due 2007 -- Ba2 affirmed,

iii) $200 million 6.63% Senior Unsecured Notes, due 2009 -- Ba2 affirmed,

iv) $150 million 6.9% Senior Unsecured Notes, due 2017 -- Ba2 affirmed.

Moody's has withdrawn the ratings on Dean Foods Company's existing credit facilities, which will be refinanced and retired upon closing the newly rated credit facilities.

Proceeds from the new credit facilities will not increase overall leverage. The facilities will reduce pricing, significantly reduce scheduled amortization over the next two years, and increase flexibility to make acquisitions.

Dean's ratings are supported by its steady, reliable cash flow base. The company has evolved to a dominant market position in the U.S. dairy industry, with national reach, a favorable cost position, and a large revenue base ($9.5 billion in the LTM ending 3/31/04). Dean's dairy operations (80% of sales) are supported by a large direct store delivery system (6,000 routes) that supplies a diverse customer base. Input cost increases and decreases are generally flowed through to customers on a monthly basis, though full recovery of cost increases may lag actual increases. The company should see continued opportunity to acquire smaller dairy operations and consolidate assets to improve its cost position and market share.

The ratings, however, also recognize the limits of low margins, flat to declining overall milk consumption, and continued industry overcapacity, which keeps competition keen. The ratings also consider Dean's heavy investment in branded products operations, such as Silk soymilk and Horizon Organic, which are rapidly growing, relatively new product categories. These brands offer significant growth potential but require heavy spending to establish and support brand values and extend distribution, with sustained long term profitability and demand levels not yet established. Finally, the ratings take into account the potential for increases in leverage to support acquisitions, capital investment to grow its business, and/or share repurchases.

Dean's $3.1 billion of debt represents about 3.3x LTM EBITDA (through 3/31/04). Adjusted for leases, leverage would be higher, at 3.8x EBITDA. LTM free cash flow (before working capital but after capital spending) represented about 11% of debt, implying reasonable ability to reduce debt, absent acquisitions or share repurchases. Interest coverage by LTM EBITDA less capital spending is 3.9x (2.7x adjusted for leases).

Dean's SGL-1 liquidity rating reflects ample liquidity. Cash flow generation more than covers capital spending plans. The new credit facilities enhance liquidity by decreasing interest expense, eliminating the bulk of scheduled amortization over the next two years, and eliminating the step-down in the leverage covenant. Revolver availability at 3/31/04, taking into account usage of the revolver to back $117 million of letters of credit, would be about $642 million. Covenant cushion is comfortable. The company also has a $500 million receivables facility, maturing in November 2005, which was fully utilized at 3/31/04.

The Ba1 rating on Dean's senior secured credit facilities is not notched up from the senior implied rating because these facilities represent the bulk of outstanding debt. The facilities are secured by a perfected, first priority lien on most of the material and intangible assets of Dean and its subsidiaries (other than Dean's Spanish subsidiary, the material real property assets of Dean Holding Company, and the receivables supporting utilization of Dean's receivables facility). The facilities are guaranteed by Dean's material domestic subsidiaries.

The rating on the unsecured notes of Dean Holding Company (successor to old Dean) is notched down from the senior implied rating to reflect the unsecured status of the notes and the effective subordination of the notes to outstandings under Dean's secured credit facilities and receivables facility. The unsecured notes do not benefit from guarantees from Dean or subsidiaries.

Dean Foods Company has headquarters in Dallas, Texas. The company had revenues of $9.5 billion in the twelve months ending 3/31/04.

New York
William L. Hess
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Helen Calvelli
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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