MOODY'S UPGRADES DEAN FOODS' SR IMPLIED TO Ba1, DEAN HOLDING'S SR UNSECURED NOTES TO Ba2; OUTLOOK STABLE
Approximately $3.4 Billion of Credit Facilities and Debt Securities Affected
New York, July 21, 2003 -- Moody's Investors Service upgraded to Ba1 from Ba2 the senior implied
rating of Dean Foods Company (Dean). Moody's also upgraded
Dean Holding Company's $700 million of senior unsecured notes
to Ba2 from Ba3, and confirmed its Ba1 rating on Dean's $2.7
billion senior secured credit facility. The rating actions conclude
Moody's review of the company's ratings, initiated July
2, 2003. The ratings outlook is stable.
The rating upgrades follow the conversion of substantially all of Dean's
$600 million trust preferred securities into equity and Dean management's
stated commitment to operate at lower levels of financial leverage than
in the past. The ratings also are supported by Dean's scale,
its market dominance in the U.S. dairy industry, and
the relative stability of its cash flow. The stable ratings outlook
reflects Dean's current and expected near term leverage and provides some
cushion for moderate acquisition activity and/or share repurchases.
Moody's ratings actions for Dean were:
Dean Foods Company
i) $2.7 billion senior secured credit facility, maturing
2007-08 - Ba1 confirmed,
ii) Senior implied -- to Ba1 from Ba2,
iii) Unsecured issuer rating -- to Ba2 from Ba3,
iv) Liquidity rating -- SGL-1.
Dean Holding Company
i) $100 million 6.75% senior unsecured notes,
due 2005 -- to Ba2 from Ba3,
ii) $250 million 8.15% senior unsecured notes,
due 2007 -- to Ba2 from Ba3,
iii) $200 million 6.63% senior unsecured notes,
due 2009 -- to Ba2 from Ba3,
iv) $150 million 6.9% senior unsecured notes,
due 2017 -- to Ba2 from Ba3.
The stable ratings outlook takes into account Dean's recently announced
acquisition agreements. Over the intermediate term, Moody's
believes Dean has the ability to enhance its financial cushion,
even with continued moderate acquisition activity and heavy planned investment
in the company's value-added business. Dean's ratings
could be upgraded eventually if Dean sustains a more conservative leverage
profile than in the past, with an appropriate cushion to retain
flexibility for potential acquisition activity, and moves to a predominantly
unsecured debt structure.
Dean's ratings are supported by the reduction in financial leverage
accomplished with the conversion of substantially all of Dean's
$600 million of trust preferred to common equity and the company's
intention to operate at more conservative leverage levels than in the
past. Moody's anticipates that announced 2003 acquisitions
(expected to close later in the year) will keep leverage modestly above
3x EBITDA in 2003, but that Dean will apply free cash flow to reduce
leverage to lower levels going forward.
Dean's ratings also gain support from Dean's overall business scale
($9 billion in total revenues) and its evolution to a dominant
market position in the U.S. dairy industry. Dean's
large dairy operations (80% of revenues) provide a stable business
platform with predictable and durable cash flow. Milk is a perishable
food staple with stable underlying demand that historically has been relatively
price inelastic. Dean is the largest fluid milk processor in the
U.S. and the only processor with national reach.
The company has a favorable cost position in the milk processing industry,
a significant direct-store-delivery refrigerated distribution
system, and customer and supply diversity. Its regional dairy
market penetration and national scope provide opportunity to optimize
logistics to reduce costs, offer advantages in efficiently serving
Dean's consolidating grocery/club/mass merchandiser customer base,
provide an effective platform for modest add-on dairy-related
acquisitions with opportunity for cost savings and synergies, and
offer potential for increases in market share over time.
The ratings also incorporate the value of Dean's growing portfolio
of higher value-added products (about 15-20% of revenues).
The portfolio currently includes national brands such as Silk (the market
leader in the currently very rapidly growing soy milk category);
International Delight (liquid non-dairy coffee creamer); Marie's
(salad dressings and dips); and Land O'Lakes, Folgers,
Jakada and Hershey (which are under license for certain dairy-related
Dean's ratings are limited by the low margins characteristic of
Dean's traditional dairy business, its primary operating segment
(about 80% of revenues). Fluid milk consumption is flat
to slightly declining, and margins are constrained by retailer pricing
leverage. Although industry practices involve regular and frequent
price changes with retailers, processors can be exposed to some
lag in recapturing cost spikes for raw milk and other inputs (fuel,
packaging), which can be volatile, while retailers tend to
keep the benefit of input cost reductions.
The ratings also reflect the challenges of growing relatively new branded
businesses such as soy and flavored milk products, which require
heavy up front spending to establish the brand value and for which ultimate
sustained demand levels and pricing sensitivities are not yet clearly
established. In addition, certain segments of Dean's
branded business (International Delight, Hershey's beverages,
Jakada) are exposed to competition from much larger companies (such as
Nestle and Coca Cola), which have greater resources than Dean and
long track records of successful brand management. The ratings
also take into account some potential for acquisition event risk.
In addition to modest tack-on acquisitions in milk processing,
Dean may see attractive opportunities to acquire other branded assets
to step up the pace of development of its value-added portfolio
(such as its recently announced agreement to acquire the remaining 87%
of Horizon Organic that it currently does not own, expected to close
in the fourth quarter). Multiples paid for branded assets with
high growth potential, such as Horizon Organic, tend to be
high and returns therefore may be more uncertain up front, at the
time of the acquisition.
The conversion of Dean's trust preferred (completed in late June
2003) significantly improved credit measurements. Pro forma for
the conversion, LTM (3/31/03) Debt/EBITDA would be 3.3x,
down from 4.0x EBITDA at 12/31/02 and 4.4x at 12/31/01 (pro
forma for the acquisition of Legacy Dean). Dean has material operating
leases, primarily for its direct-store-delivery distribution
infrastructure, yielding pro forma lease-adjusted leverage
of 3.9x EBITDAR, down from 4.5x at 12/31/02.
LTM operating cash flow less capex to pro forma 3/31/03 debt improves
to about 12%, from 9% in FY 2002. For FY03,
Moody's expects leverage to remain at about pro forma LTM levels
due to announced acquisition activity (Horizon Organic and Michael Foods'
Kohler Division, both expected to close in 2H03), continued
heavy capital spending, and increased investment in value-added
product development and marketing. Significant outstanding stock
options (about 20% of shares outstanding) may lead to offsetting
share repurchases, when and if the options are exercised,
which Moody's expects Dean would manage within cash flow. Dean's
balance sheet intangibles are high, accounting for about 55%
of Dean's 12/31/02 assets, but a reasonable return on assets
(about 10%) suggests value in the intangibles.
Pro forma LTM EBIT coverage of interest expense is 3.4x,
up from 2.8x in FY2002. Pro forma LTM EBITR coverage of
interest and rentals is 2.5x, up from 2.2x in FY2002.
Dean's SGL-1 liquidity rating reflects very good liquidity.
Cash flow generation is expected to be at levels that cover funding of
planned capital spending and scheduled debt maturities over the next year.
The company has significant committed availability under its revolving
credit facility ($715 million at 3/31/03) and accounts receivable
facility ($85 million at 3/31/03), and is expected to maintain
ample cushion under financial covenants.
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 $2.7 billion secured
credit facility ($1.8 billion outstanding at 3/31/03) and
$400 million accounts receivable facility ($245 million
outstanding at 3/31/03). Dean Holding Company is a wholly-owned
indirect subsidiary of Dean. The unsecured notes do not benefit
from guarantees from Dean or subsidiaries.
The Ba1 rating on Dean's senior secured credit facilities is not
notched up from the senior implied rating because they represent the majority
of outstanding debt. The credit facilities are secured by a perfected,
first priority lien on most of the material tangible and intangible assets
of Dean and its subsidiaries (other than Dean's Spanish subsidiary,
the material real property assets of Dean Holding Company, and receivables
supporting utilization of Dean's $400 million receivables
facility). Collateral coverage could rely to some extent on intangible
trademarks and brand names, but should be ample for the secured
facilities. The facilities are comprised of an $800 million,
six-year revolving credit, a $900 million six-year
Term Loan A, and a $1 billion seven-year Term Loan
B ($1.8 billion of term loans were outstanding at 3/31/03).
Dean Foods Company, the leading processor and distributor of fresh
milk and other dairy products in the U.S., is headquartered
in Dallas, Texas. Dean's revenues were about $9 billion
Corporate Finance Group
Moody's Investors Service
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service