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Rating Action:

MOODY'S UPGRADES DEAN FOODS' SR SECURED TO Ba1 FROM Ba2, SR UNSECURED TO Ba3 FROM B1, TRUST PREF TO B1 FROM B2; OUTLOOK STABLE

21 Feb 2003
MOODY'S UPGRADES DEAN FOODS' SR SECURED TO Ba1 FROM Ba2, SR UNSECURED TO Ba3 FROM B1, TRUST PREF TO B1 FROM B2; OUTLOOK STABLE

Approximately $4 Billion of Credit Facilities and Debt and Preferred Securities Affected

New York, February 21, 2003 -- Moody's Investors Service upgraded the ratings of Dean Foods Company (Dean). The ratings outlook is stable. The upgrades reflect Dean's effective integration of Dean Food Corporation (Old Dean) and reduction in leverage since the December 2001 $1.7 billion acquisition of Old Dean (which added 70% to Dean's revenue base). The ratings are supported by Dean's scale and geographic reach as the dominant fluid milk processor in the U.S. and its cash flow durability, but restrained by Dean's high financial leverage.

Moody's ratings actions were:

Dean Foods Company

i) $2.7 billion senior secured credit facility, maturing 2007-08, to Ba1 from Ba2,

ii) Senior implied -- to Ba2 from Ba3

iii) Unsecured issuer rating -- to Ba3 from B1

iv) Liquidity rating -- SGL-1

Dean Holding Company (successor to Old Dean)

i) $100 million 6.75% senior unsecured notes, due 2005 -- to Ba3 from B1

ii) $250 million 8.15% senior unsecured notes, due 2007 -- to Ba3 from B1

iii) $200 million 6.63% senior unsecured notes, due 2009 -- to Ba3 from B1

iv) $150 million 6.9% senior unsecured notes, due 2017 -- to Ba3 from B1

Dean Capital Trust

i) $600 million Trust Convertible Preferred (TIPES) -- to B1 from B2

The stable ratings outlook accommodates share repurchases if funded from cash flow, as well as add-on acquisitions that do not result in leverage above Dean's targeted parameters of 3-3.5x EBITDA (excluding the TIPES). Ratings could gain support with continued leverage reduction and enhancement to the company's business platform over time through further asset rationalization, cost reduction, and sustained success in the growth and development of its branded product portfolio. Ratings pressure could develop from debt-funded share repurchases or acquisitions.

With the acquisition of Old Dean, Dean became the largest fluid milk processor in the U.S. and the only processor with national reach. The company has scale (about $9 billion in revenues), a favorable cost position in the industry, and customer and supply diversity. Its regional market penetration and national scope provide opportunity to optimize logistics to reduce costs and provide advantages with Dean's consolidating grocery/club/mass merchandiser customer base. In addition, Dean's cash flow is durable. Milk is a perishable food staple with stable underlying demand that historically has been relatively price inelastic. Processors set prices monthly with retailers, facilitating pass-through of raw material and other cost increases. The ratings also take into account Dean's demonstrated skills with acquisitions and follow-on integration. Dean has realized over $100 million of cost savings to date compared with the initial $60 million targeted cost savings following the acquisition of Old Dean. Dean believes it can achieve an additional $50 million of savings over the next two years.

Dean's ratings are limited by its financial leverage and the low margins characteristic of Dean's traditional dairy business, its primary operating segment (Dean's traditional dairy business accounted for about 75% of 2002 revenues). In addition, Dean has high growth objectives, has been acquisition-oriented, and has done significant share repurchases. Moody's anticipates some additional acquisition activity as the dairy industry continues to consolidate. Dean also plans significant investment to continue to grow its higher margined, branded value-added business. The ratings also take into account the intensely competitive nature of the traditional dairy business. 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, and retailers tend to keep the benefit of input cost reductions.

Dean reduced debt to $3.3 billion (including the TIPES) at 12/31/02 from $3.6 billion at 12/31/01 (following the acquisition of Old Dean), decreasing leverage to 4.0x EBITDA from 4.4x at 12/31/01 (pro forma for the Old Dean acquisition). Lease adjusted leverage at 12/31/02 was 4.4x (Dean has material operating leases, mainly relating to its direct store distribution system). EBIT coverage of interest expense (about $190 million) and TIPES dividends ($33 million) is adequate for the rating level at 2.9x. Intangibles are high, accounting for about 56% of Dean's 12/31/02 assets, but a reasonable return on assets (about 10%) suggests value in the intangibles. In 2002, capital spending in excess of depreciation, heavy investment in value-added product development and brands, and $100 million of share repurchases (partially offset by proceeds from options exercised) left free cash flow at a modest 7% of outstanding 12/31/02 debt. Moody's expects a similar profile in 2003. Dean has repurchased 3.24 million shares to date in 2003 ($129 million), anticipating significant options exercises and net free cash flow to provide the funding during the course of the year. Moody's expects that Dean will direct additional realized cost savings to reinvestment in its value-added businesses, restraining free cash flow improvement. Leverage reduction could be possible from conversion of all or part of the TIPES to equity (the conversion price is close to Dean's current share price and the securities can be called by Dean).

Dean's SGL-1 liquidity rating reflects cash flow generation at levels expected to be sufficient to fund the company's planned capital spending and scheduled debt maturities over the next year, significant committed availability under its $800 million revolving credit facility ($728 million available at 12/31/02) and $400 million accounts receivable facility ($255 million unfunded at 12/31/02), and ample cushion under financial covenants. Moody's expects front-ended 2003 share repurchases and capex to result in a moderate increase in borrowings under the revolver and receivables facilities in the first half of the year, with debt then reducing in the second half of the year, for little change in debt year-to-year.

The Ba3 rating on the unsecured notes of Dean Holding Company (successor to Old Dean) is notched down from the senior implied rating to reflect their unsecured status and considerable effective subordination to outstandings under Dean's $2.7 billion secured credit facility ($1.9 billion outstanding at 12/31/02) and $400 million accounts receivable facility ($145 million outstanding at 12/31/02). Dean Holding Company is a wholly-owned indirect subsidiary of Dean. Dean does not guaranty the unsecured notes.

The Ba1 rating on Dean's senior secured credit facilities is notched up from the senior implied rating to reflect their secured position and the large, underlying cushion of more junior capital (the unsecured notes and TIPES). The credit facilities are secured by a perfected, first priority lien on the 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 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 ($832.5 million balance as of 12/31/02), and a $1 billion seven-year Term Loan B ($995.1 million balance as of 12/31/01).

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 in 2002.

New York
Andris G. Kalnins
VP - Senior Credit Officer
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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