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Rating Action:

Moody's assigns B1 CFR to Moy Park; outlook stable

20 May 2014

London, 20 May 2014 -- Moody's Investors Service has today assigned a corporate family rating (CFR) of B1 and probability of default rating (PDR) of B1-PD to Moy Park Holdings (Europe) Limited (Moy Park).

Concurrently, Moody's has assigned a (P)B1 rating to Moy Park (Bondco) Plc's GBP 200 million senior unsecured fixed rate notes due 2021 and the GBP 50 million senior unsecured floating rate notes due 2017. The outlook is stable.

Proceeds from the notes will be used to pay a dividend to Moy Park's parent Marfrig Global Foods S.A. (B2 stable), and to fund the acquisition of the European assets of fellow Marfrig subsidiary Keystone.

Moody's issues provisional ratings in advance of the final sale of securities and these ratings reflect Moody's preliminary credit opinion regarding the transaction only. Upon a conclusive review of the final documentation, Moody's will endeavour to assign a definitive rating to the notes. A definitive rating may differ from a provisional rating.

RATINGS RATIONALE

Moy Park's CFR is weakly positioned in the B1 category. This reflects: (1) the company's limited product diversification; (2) its high geographic and customer concentration; (3) the potential for events beyond the company's control; and (4) a leveraged credit profile, with weak margins reflecting the commodity-like nature of its products, and negative free cash flow.

The rating also reflects the company's: (1) leading market position; (2) favourable sector demand dynamics; and (3) strong, longstanding relationships with key suppliers and customers.

Moody's estimates that sales of fresh poultry products, ready to eat and coated poultry together account for approximately 80% of Moy Park's revenues. This dependence on poultry sales leaves the group exposed to changing tastes or consumption patterns. However, as the most affordable meat protein in the UK, the government department DEFRA reports that poultry has experienced higher growth in consumption rates than other meats, and represents approximately half of meat purchases by weight. This growth appears to be supported by consumer preferences for fresh, convenient and healthy food, sourced within the UK.

Furthermore, geographic and customer concentration in the industry is very high, with the group's customer base predominantly made up of the large UK retailers, plus important customers within the food services segment. The group's concentrated customer exposure is partially mitigated by its long-standing relationships, and mutual dependency. The consolidated nature of the poultry processing industry means that while customers have more than one supplier, material switching away from Moy Park which typically has estimated number one or number two supplier status with a material share of customers wallet - would be problematic.

The potential for events beyond the full control of individual food producers to impact demand includes exposure to: (1) input-cost inflation; (2) business issues experienced by key suppliers; (3) food scares. Moy Park works closely with suppliers and customers to limit and mitigate risks. For example, over recent years it has increased the proportion of business with customers where feed price variability is specifically addressed via agreed pricing models (fixed price deals, rolling feed models, customer hedging) from 30-40% to approximately 70%.

The nature of the contractual relationship with suppliers of breeding stock and with broiler farmers is such that Moy Park has a high degree of inter dependence. These relationships typically date back many years and Moy Park is able to regularly check and satisfy itself as to bio-security, and in the case of farmers has control over the feed, other inputs such as vaccines and utilities, and indeed is heavily involved in issues such as the poultry's living conditions. The UK poultry industry has a high level of traceability and bio-security, while the relatively remote location of the farms employed by the company i.e. within relatively sparsely populated areas of the UK, and notably within Northern Ireland, serves as a further barrier to risks of contamination.

At close, pro-forma for the transaction, Moy Park has gross debt of GBP 293 million and reported LTM (to 31 March 2014) EBITDA of GBP 101 million. Moody's has considered the costs of breeding (bearer) stock as opex rather than capex, and has deducted amortisation of bearer stock in adjusting reported EBITDA. Moody's adjusted EBITDA margin is low at about 6%, reflecting the essentially commodity-like nature of the product. Moody's expects adjusted gross leverage at the end of 2014 to be 4.7x, with the pace of deleveraging likely to be slow. With capex at approximately 3% of sales, as the company continues to invest in new production lines to match demand, Moody's expects free cash flow to remain moderately negative in 2014.

Moy Park began the financial year with a GBP 60 million cash balance. The company's liquidity is further supported by the availability of a GBP 20 million revolving credit facility (RCF) and a GBP 45 million receivables facility, the latter of which is secured by the receivables financed. These facilities include identical Net Total Leverage and Net Senior Leverage maintenance covenants. While the receivables line is off-balance sheet, some utilisation of it is included in Moody's calculations of Moy Park's gross debt. The company has no near-term debt maturities or amortising debt.

Moy Park is currently wholly-owned by Marfrig. The ring-fenced nature of Moy Park's financing, which includes the mutual absence of any guarantees or other credit support or direct credit linkages between it and Marfrig, means that Moy Park's B1 CFR reflects its own credit fundamentals. This is a notch above the rating of Marfrig. However, such positive ratings differentiation will remain limited while Marfrig remains a majority and/or controlling shareholder, with any downwards pressure on the Marfrig credit profile and rating potentially flowing through to that of Moy Park.

The (P)B1 rating on the unsecured notes, which benefit from upstream guarantees, is at the same level as the CFR. This reflects the fact that all debt within the structure essentially ranks at the same level (with only a small amount of opco debt secured over specific assets).

The stable outlook on the ratings reflects Moody's expectation that: (1) Moy Park will continue to show positive momentum in earnings and ongoing ability to cope with raw material price volatility; and (2) the company will preserve some liquidity cushion, as evidenced by a sizable cash balance and headroom under its financial covenants.

As Moy Park is currently weakly positioned within the B1 category, and deleveraging is likely to be slow, near-term positive pressure is unlikely. To be considered for the Ba rating category, Moy Park would need to demonstrate a significant and sustainable improvement in margins and free cash flow generation, with adjusted debt/EBITDA also falling below 4.0x.

Negative pressure could be exerted on Moy Park's ratings if: (1) adjusted EBITDA margins were to fall towards 5%; (2) free cash flow remained negative beyond 2014; (3) leverage increased to more than 5.0x; (4) its liquidity were to weaken; or (5) the financial profile and/or rating of its parent Marfrig were to deteriorate, while it remained a majority and/or controlling shareholder.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was the Global Protein and Agriculture Industry published in May 2013. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

CORPORATE PROFILE

Headquartered in Craigavon, Northern Ireland, Moy Park is a leading player in the UK poultry processing market. It operates 14 production facilities. For the year ending 31 December 2013 the company reported revenue and EBITDA of GBP 1.4 billion and GBP 96 million respectively.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

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

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.

David Beadle
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Chetan Modi
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's assigns B1 CFR to Moy Park; outlook stable
No Related Data.
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