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13 Jun 1996
MOODY'S ASSIGNS Ba3 TO BANK DEBT AND B3 TO 144A SUBORDINATED NOTES OF KEEBLER; OUTLOOK POSITIVE
New York, 06-13-96 -- Moody's Investors Service assigned a Ba3 rating to the bank credit facilities and a B3 rating to the proposed senior subordinated notes of Keebler Corporation. The outlook is positive. The senior subordinated notes are being issued pursuant to SEC Rule 144A.
The ratings reflect the mature yet highly competitive market, the company's extremely tight credit statistics, challenges in integrating and turning around the weak historical performances of both Keebler and Sunshine Biscuits (Sunshine), and susceptibility to raw material cost increases. These risks are mitigated by the company's well entrenched position in the biscuit industry with strong brand equity, the opportunities for significant cost and operating synergies arising from the acquisition of Sunshine, and the extensive distribution network. The ratings also reflect the relative rankings of the securities within the debt structure, and the secured nature of the bank debt. The positive outlook is assigned in anticipation of margin improvements upon the successful integration of Sunshine.
Following the acquisition of Keebler in January 1996 by INFLO, Keebler went on to purchase Sunshine in June. Keebler and Sushine had been the number two and three players, respectively, in the mature biscuit industry, and the combined company has become an even stronger number two competitor following the combination. INFLO is a company formed jointly by Invus, the US investment arm of Artal Luxembourg, and Flowers Industries, the third largest baking company in the US.
The new Keebler will adopt a strategy primarily focused on cost reduction, which will include capitalizing on Keebler's existing excess direct-store-delivery capacity. The company anticipates significant margin enhancement and cost saving opportunities, not to mention potential incremental sales revenue.
Moody's believes the Sunshine acquisition and current operating plan make strategic sense, and draws confidence in management given their prior experiences running highly leveraged companies. However, the success of the strategy critically rests on improving the cost competitiveness and restoring the profitability of the combined company, which has been on the decline the past three years. The integration of Sunshine will be a large scale task and take time to fully implement, adding a significant degree of uncertainty to the margin enhancement estimates. Meanwhile, the company confronts large cost conscious retailers and Nabisco, which remains a dominant market leader with demonstrated relentless desire to protect its market position.
The company will take on these challenges within the confines of a very burdensome debt level. On a pro-forma 1995 basis, the combined company will show debt (adjusted for leases) to total capitalizaton of over 80%, with large negative tangible equity, and EBITDAR-to-fixed charge coverage of 1.4 times. In the absence of substantial cost and operating synergies, the company's ability to generate adequate returns and free cash flows for debt reduction will be significantly limited.
The $447.875 million bank credit facilities are comprised of: a $155 million revolver, due 2002; a $138.125 million term A, due 2002; a $89.85 million term B, due 2003; and a $64.9 million term C, due 2004. The facilities are guaranteed by the parent company, INFLO Holdings Corp., and subsidiaries, and secured by substantially all of the assets of the company and its subsidiaries. The agreement does provide for the release of accounts receivables as collateral if and when they are sold to a receivables program. These proceeds, however, would have to reduce the bank debt outstandings.
The Ba3 bank debt rating reflects the facilities' seniority and loan protection from both enterprise value and asset collateral perspectives. These benefits are tempered by the potential release of accounts receivables as collateral and the sizable bank debt amounts relative to the overall debt structure. The perishable nature of the inventory also diminishes the collateral coverage.
Based in Elmhurst, Il, Keebler Corporation is engaged in the manufacture and sale of retail branded and private label biscuit and diversified baking products.
No Related Data.
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