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Rating Action:

Moody's assigns B1 definitive rating to Del Monte on LBO close

09 Mar 2011

$2.7 billion of secured bank debt rated Ba3; $1.3 billion of unsecured notes rated B3.

New York, March 09, 2011 -- Moody's Investors Service has assigned a definitive Corporate Family Rating of B1 to Del Monte Foods Company ("Del Monte Foods"), the parent company of Del Monte Corporation ("Del Monte"), following the closing of the previously announced leveraged buyout ("LBO") of Del Monte by an investor group led by Kohlberg Kravis Roberts & Co. L.P. ("KKR") that also includes Vestar Capital Partners and Centerview Capital, L.P. Moody's also assigned a Ba3 rating to a new $2.7 billion senior secured term loan and a B3 rating to $1.3 billion in new senior unsecured notes, both issued to fund the transaction. Finally, Moody's assigned a Speculative Grade Liquidity rating of SGL-2 to Del Monte Foods. The rating outlook is stable.

In connection with the LBO transaction, substantially all of the preexisting rated debt at Del Monte Corporation (operating company) totaling $1.27 billion was retired using the proceeds from new debt issued by Del Monte Foods Company (holding company). Holders of approximately $10.5 million of Del Monte Corporation senior subordinated notes did not tender by the March 8th deadline under the previously announced $700 million tender offer. However, we expect these remaining operating company notes to be retired in the near-term. As such, Moody's will withdraw all the outstanding ratings of Del Monte Corporation. This concludes the rating review of Del Monte Corporation that began on November 26, 2010 when the LBO transaction was announced.

RATING RATIONALE

The B1 Corporate Family Rating of Del Monte Foods reflects the high financial leverage resulting from the LBO of the company balanced against anticipated stable operating-level performance at Del Monte Corporation, along with improving product mix and operating margins over time. The SGL-2 Speculative Grade Liquidity rating reflects strong internal cash flow and external liquidity, abundant covenant cushion under the "covenant-lite" senior secured bank facility, and the mostly-encumbered asset base.

Prior to the LBO transaction, Del Monte's credit metrics had been trending positively in recent years—debt-to-EBITDA had fallen below three times compared to over five times a few years ago—especially following the Starkist canned tuna sale in 2009 that accelerated the company's strategy of shifting sales mix away from consumer foods and toward the higher margin pet food business. Moody's estimates proforma debt-to-EBITDA at 6.7 times currently, declining to below 6 times by the end of fiscal 2012.

"We expect Del Monte's core operating performance to remain stable in the intermediate term with the expanding pet food business being the key driver of margin expansion and earnings growth," commented Moody's senior credit officer, Brian Weddington. "Barring a major leveraged acquisition, earnings growth should provide for steady reduction in leverage over time," added Weddington.

The LBO transaction, valued at $5.3 billion enterprise value, was financed with a $1.6 billion equity investment from the private equity sponsors and $4.75 billion of new debt instruments issued by Del Monte Foods Company ($4.0 billion outstanding at closing) consisting of a $750 million five-year asset-backed revolving loan facility (not rated by Moody's), a new $2.7 billion seven-year senior secured term loan, and $1.3 billion of eight-year senior unsecured notes. The company issued $200 million more secured debt than originally contemplated and reduced the unsecured notes by the same amount to accommodate strong investor demand for the floating-rate term loan. The shift did not affect the security ratings.

Ratings assigned:

Del Monte Foods Company:

Corporate Family Rating at B1;

Probability of Default Rating at B1;

$2.7 billion senior secured term loan due March 8, 2018 at Ba3 (LGD3) LGD rate at 32%;

$1.3 billion of senior unsecured notes due February 15, 2019 at B3 (LGD5), LGD rate at 85%;

Speculative Grade Liquidity rating at SGL-2.

The senior secured term loan is secured by a first priority lien on substantially all the assets of Del Monte Foods Company (other than ABL collateral) and each guarantor, and a second priority lien on the ABL collateral. The Del Monte Foods Company debt is guaranteed by all direct and indirect subsidiaries, including Del Monte Corporation.

The debt instrument ratings reflect both the overall probability of default (as reflected in the B1 PDR) and an average mean family loss given default assessment of 50% (or a mean family recovery estimate of 50%), in line with Moody's LGD Methodology.

Ratings withdrawn:

Del Monte Corporation:

Corporate Family Rating of Ba2;

Probability of Default Rating of Ba2;

Senior secured bank credit facility of Baa3 (LGD2), LGD rate of 20%;

Senior subordinated notes of Ba3 (LGD5), LGD rate of 74%;

Speculative Grade Liquidity rating of SGL-2.

Moody's believes that leverage and event risk likely will remain high at Del Monte Foods while under the control of private equity sponsors. For this reason, the possibility of a ratings upgrade in the foreseeable future is limited. However, the ratings could be considered for an upgrade if the company maintains stable operating performance, and is able to sustain Debt to EBITDA below 5.0 times and Retained Cash Flow to Net Debt above 11%.

A ratings downgrade could be caused by deterioration in operating performance, a major acquisition or unfavorable change in capital structure. Quantitatively, downward ratings pressure would build if Debt to EBITDA exceeded 7.0 times, or Retained Cash Flow to Net Debt fell below 10%.

For more information on Del Monte Foods Company, refer to moodys.com.

The most recent rating action on Del Monte Foods Company was on January 25, 2011 when Moody's assigned provisional ratings to the corporate family and to the company's proposed $4 billion debt offering to fund the $5.3 billion LBO transaction announced on November 25, 2010. The most recent rating action on Del Monte Corporation was on November 26, 2010 when Moody's placed its ratings on review for possible downgrade following the company's announcement that it had agreed to sell itself to an investor group led by KKR for a total of $5.3 billion.

The principal methodologies used in this rating were Global Packaged Goods Industry published in July 2009, and Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009.

Headquartered in San Francisco, California, Del Monte Corporation is one of the largest producers, distributors and marketers of premium quality branded food and pet products for the U.S. retail market. Revenues for the last twelve months ended October 31, 2010 were approximately $3.7 billion.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

New York
Brian Weddington, CFA
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Christina Padgett
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's assigns B1 definitive rating to Del Monte on LBO close
No Related Data.
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