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Rating Action:

Moody's affirms MVK's Corporate Family Rating at B2

21 May 2020

New York, May 21, 2020 -- Moody's Investors Service, ("Moody's") affirmed MVK Intermediate Holdings, LLC's (MVK) B2 Corporate Family Rating (CFR) and B2-PD Probability of Default Rating. Moody's also affirmed the B2 (LGD 4) ratings to the company's $60 million senior secured first lien revolving credit facility and $335 million first lien senior secured term loan. The outlook is stable.

MVK is seeking to temporarily increase its revolving credit facility by up to $25 million to provide for additional liquidity during the peak seasonal cash use period. The incremental revolver will decline to $1 million after November 2020. The additional revolver capacity will be used to enhance liquidity during the peak seasonal working capital need in May/June until the stone fruit selling season ramps up over the course of the summer months and drives seasonal cash inflows. Moody's considers the incremental facility as credit positive as it will provide additional flexibility to compensate for a weak 2019 operating season and delay in closing of the merger in September 2019 and subsequent slower than expected achievement of synergies that would have otherwise put the company on stronger footing.

Moody's affirmed the B2 CFR with a stable outlook despite weak operating performance driven by stone fruit pricing deterioration in the summer 2019 season because Moody's expects an improved pricing environment in 2020 to lead to stronger earnings and free cash flow. Moody's expects stone fruit demand to be stable with some potential for uplift because of greater at-home and healthy food consumption during the coronavirus pandemic.

The following ratings/assessments are affected by today's action:

Rating Affirmations:

..Issuer: MVK Intermediate Holdings, LLC

.... Corporate Family Rating, Affirmed B2

.... Probability of Default Rating, Affirmed B2-PD

....Senior Secured 1st Lien Revolving Credit Facility, Affirmed B2 (LGD4)

....Senior Secured 1st Lien Term Loan, Affirmed B2 (LGD4)

Outlook Actions:

..Issuer: MVK Intermediate Holdings, LLC

....Outlook, Remains Stable

RATINGS RATIONALE

The B2 CFR reflects MVK's cash flow volatility due to seasonality of business, relatively small scale with desirable but concentrated growing acreage in California's San Joaquin Valley, and customer concentration with 46% of sales generated from its top 5 customers. The stone fruit business is also subject to significant season-to-season volatility from weather-dependent growing conditions, competition for distribution and shelf space with retailers, and fluctuating fruit prices. Moody's believes that MVK needs to maintain good liquidity to weather the typical variations in operating performance. The rating also reflects that while MVK enters the 2020 season with weak financial leverage (Debt/EBITDA) in a high 7x range estimated as the end of 2019, Moody's projects debt-to-EBITDA to decline to approximately 6.5x by year-end 2020 after working capital needs subside, and to 5.5x or lower within 12 -18 months, reflecting earnings growth and debt paydown based on a normalized pricing and volume selling season. The rating is also supported by the company's strong position in the US conventional and organic stone fruit market (primarily peaches and nectarines), positive secular trends in organic and healthy living, strong profit margins, good liquidity and moderate free cash flow. Moody's expects MVK's annual free cash flow to range between $15 million and $30 million per year.

The coronavirus pandemic outbreak nevertheless presents some risk notwithstanding Moody's expectation for improved stone fruit pricing in 2020. The pandemic may cause disruptions to US supply and demand of stone fruit that could impact pricing. A prolonged US recession may also result in consumers trading down to less expensive fruit which may negatively impact MVK's otherwise strong margins. Additionally, MVK remains vulnerable to potential outbreaks at its facilities, though no material outbreaks have been noted to date. Offsetting this potential volatility is MVK's focus in primarily retail and wholesale channels which have performed well through the shelter-in-place directives. Additionally, the company offers variability in packaging options that will benefit from retailer and consumer preferences to reduce handling of loose produce in this post-pandemic environment. MVK is also well diversified through multiple pack houses and geographically dispersed ranches minimizing operational risk.

ESG considerations include high social risks associated with the coronavirus outbreak given the substantial implications for public health and safety. The rapid and widening spread of the coronavirus outbreak, lingering state closures, deteriorating economic outlook, and falling oil prices are creating a severe and extensive credit shock across many sectors. The combined credit effects of these developments are unprecedented. The protein and agriculture sector has been somewhat affected by the shock given its sensitivity to consumer demand and sentiment including a change in consumer purchasing habits and volatility in price. More specifically, there could be shifts in market sentiment during these unprecedented operating conditions. Other EGS considerations include corporate governance risk associated with an aggressive financial policy evidenced by high financial leverage.

The stable outlook reflects Moody's view that the incremental revolver will allow MVK to maintain good liquidity into the peak selling season and that the company will benefit from positive trends in the stone fruit market and maintain strong margins over the next 12 to 18 months. The outlook also reflects Moody's view that the company's financial leverage will steadily improve due to earnings growth and some debt repayment.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The ratings could be downgraded if stone fruit pricing or volume is weaker than expected over the 2020 selling season, MVK's operating margin declines, cash flows deteriorate, market share declines, or liquidity weakens. Ratings could also be downgraded if debt to EBITDA is sustained above 5.5x.

The rating could be upgraded if the company successfully integrates the Wawona Packing and Gerawan Farming businesses, improves revenues, and reduces leverage such that debt to EBITDA is sustained below 4.0x. The company would also need to sustain stronger free cash flow and liquidity to be considered for an upgrade.

The principal methodology used in these ratings was Protein and Agriculture published in May 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1113389. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Fresno, California, MVK Intermediate Holdings, LLC (MVK) is the holding company of Wawona Packing Company, LLC and subs (owning the operating assets), and Wawona FarmCo, LLC (owning the farmland and trees). In September 2019, legacy companies, Wawona Packing Company (Wawona) and Gerawan Farming (Gerawan), merged their businesses into MVK, which is majority owned and controlled by private equity firm Paine Schwartz Partners with minority ownership by Dan Gerawan. Wawona (founded in 1948) and Gerawan (founded in 1938) are growers, packers and suppliers of organic and conventional stone fruit including peaches, nectarines, plums, tree nuts and citrus. The combined company generates pro-forma revenue of approximately $300 million per year and owns over 17,000 acres of farmland in the highly desirable San Joaquin Valley in California.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Maria Iarriccio
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

John E. Puchalla, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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