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Global Credit Research - 16 Nov 2010
New York, November 16, 2010 -- Moody's today affirmed Dean Foods Ba3 CFR and other ratings,
changed the outlook for Dean and its subsidiaries to negative from stable
and lowered the speculative grade liquidity rating to SGL-3 from
SGL-2. The outlook change reflects the pressure on profitability
that the company has continued to experience amid price and mix pressures
in its Fresh Dairy Direct business, which is driving credit metrics
into weaker ranges than previously expected. The change in the
SGL reflects that while internal and external liquidity remain sound,
the company will be much tighter than expected against its bank loan covenants
when they become more restrictive next year, which we believe may
lead to the need to seek covenant relief for the leverage covenant.
Dean has experienced profit pressures due in part to retailers using private
label milk as a traffic driver. This activity has been funded partially
by the retailers themselves, but also in part by concessions by
Dean. This price strategy has also widened the price gap between
private label milk and Dean's more profitable branded milk offering,
adding negative mix shift issue to the profit pressure already being caused
by the price concessions. Further exacerbating the negative price
and mix trends, has been a volume decline in milk consumption (with
flat volumes for Dean) and a spike in the price of butterfat which is
used in some of Dean's dairy products. As a result othis
confluence of negative developments, Dean now expects that its bank-defined
leverage will slightly exceed 5 times by calendar year end, which
puts it between 5.5 and 6.0 times using Moody's standard
adjustments. While this would still be well below the leverage
of close to 6.5 times reached in 2007, it is nevertheless
trending high for the rating category. Should leverage be sustained
above 5.5 times (using Moody's adjustments) in 2011 and if
business conditions remain unfavorable for milk processors, the
rating could be lowered, said Linda Montag, Moody's
Senior Vice President.
Dean's liquidity rating was lowered to SGL-3 from SGL-2.
This reflects the fact that the cushion above the leverage covenant required
by the credit agreement will be thin, with bank-defined leverage
of over 5 times likely by December (when the covenant is set at 5.5
times) and especially given that the covenant steps down to 5 times in
Dean's Ba3 rating is supported by the company's leading market share and
national scale in the US Dairy industry, the potential for further
cost efficiencies/productivity improvements as management focuses on internal
integration, streamlining of operations and further cost reduction
initiatives, as well as its strong distribution network with comprehensive
refrigerated direct store delivery systems. These positives are
offset by very narrow margins inherent in its largest, commodity-oriented
milk business, more limited product/geographic/customer diversification
than certain other large global food and agriculture firms, and
the potential for both volatility in milk prices, as well as shifts
in the pricing strategies of retailers creating increased price competition
among processors to erode profitability.
The last rating action was on July 9th 2010 when we assigned ratings to
the new bank facilities.
The principal methodology used in rating Dean Foods was Moody's Global
Packaged Goods Methodology, published in July 2009 and available
on www.moodys.com in the Rating Methodologies sub-directory
under the Research & Ratings tab. Other methodologies and factors
that may have been considered in the process of rating this issuer can
also be found in the Rating Methodologies sub-directory on Moody's
Dean Foods, based in Dallas, TX, is the largest processor
and distributor of milk and various other dairy products in the United
States, and the largest producer of soy milk in Europe through its
Alpro division, with consolidated net sales of approximately $11.2
billion in 2009, of which dairy operations accounted for around
Senior Vice President
Corporate Finance Group
Moody's Investors Service
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's affirms Dean Foods Ba3 CFR; changes rating outlook to negative and lowers SGL to SGL-3
250 Greenwich Street
New York, NY 10007
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