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Related Issuers
Rating Action:

Moody's assigns Ba2 rating to Premier Foods

14 Feb 2011

London, 14 February 2011 -- Moody's Investors Service has today assigned a Ba2 corporate family rating (CFR) to Premier Foods plc ("Premier" or "the company"). The outlook is stable.

RATINGS RATIONALE

"The Ba2 CFR reflects Premier's investment grade business risk profile as the largest food manufacturer in the UK, with a large portfolio of well-known brands," says Douglas Crawford, Moody's lead analyst for Premier. "The company's business profile is further supported by the number one or two positions its products hold in the UK market, with market shares often in double digits."

Moody's expects that Premier's leading market position in the UK will continue to benefit from the historical heritage of most of the group brands, which are strongly associated with British food, thanks to its ability to launch brand extensions and innovate within its product lines.

However, Moody's notes Premier's degree of customer concentration, with the top 5 UK retailers representing almost 60% of company revenues. Despite Premier's solid relationships with its large, key retailers and its leading branded products, Moody's believes that, for its non branded and a few of its branded products, the company has limited negotiating power and is impacted by input price rises and its customers' promotional activity.

Moody's views Premier's historic financial risk profile as weak for the rating, reflected by high leverage of 5x (Moody's adjusted, as of 26 June 2010). However, Moody's expects material improvement in key credit metrics by 30 June 2011, due to the completion of the disposals of the meat-free and East Anglian canned grocery operations for net proceeds of around GBP374 million; and the rating agency believes that the company will achieve low double digit free cash flow to debt (FCF/debt).

In terms of financial policy, Moody's understands that the company is now focusing on organic growth with the primary aim to reduce indebtedness and has simplified its balance sheet. Although clear evidence of deleveraging is not yet visible, the rating is supported by the company's target to reduce Reported Average Gross Debt to EBITDA to below 3.25x over the short term. Furthermore, the rating agency recognises the benefit that the recent disposals will have when they complete. Moody's ratings have also not incorporated the prospect of dividends until the company's metrics have shown material recovery.

In Moody's view, Premier's current liquidity profile is satisfactory, due to limited debt maturities over the short term and supported, at 30 September 2010, by GBP342 million availability under a committed GBP500 million revolving credit facility (RCF) that matures in 2013. The rating agency assumes that cash received from disposal proceeds will be used to repay the term debt facility. Moody's notes that the business is subject to a degree of seasonality, with the company needing almost GBP200 million of cash to finance its working capital needs, mainly to ramp up inventories for the Christmas period. Covenant headroom was 17% as at 26 June 2010 and Moody's expects the completion of the disposals and recent interest rate swap restructuring to substantially boost liquidity and reduce potential cash flow volatility going forward. However, the Ba2 rating also incorporates an assumption that the company will address the 2013 debt maturities in a timely fashion.

The stable outlook reflects Moody's expectation that Premier Foods will pursue a conservative financial policy going forward, maintaining positive, albeit modest organic growth, and reducing its leverage over time, preserving at all times an adequate liquidity profile.

Positive pressure could evolve if Premier Foods leverage approaches 3x and RCF to Net Debt approaches 16%. On the contrary, negative pressure could develop on the rating if leverage approaches 4.5x from 30 June 2011 onwards and RCF to Net Debt approaches 12% or if free cash flow is negative or the criteria set for the stable outlook are not met.

The principal methodology used in this rating was Global Packaged Goods Industry published in July 2009.

Premier Foods, based in St Albans, is the largest manufacturer and distributor of food in the UK, with a focus on ambient grocery, bread and chilled products. The company has around 16,000 employees producing foods from around 60 facilities based in the UK and Ireland. For the last-twelve-months (LTM) period ended 26 June 2010, Premier reported revenues and adjusted EBITDA of GBP2.6 billion and GBP354 million. As at March 2010, the largest shareholder was Warburg Pincus with 16% of the company, while other shareholders include Franklin Templeton with 13% and Paulson Europe with 12%.

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.

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

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London
Douglas Crawford
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Chetan Modi
Senior Vice President
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Investors Service Ltd.
One Canada Square
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United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's assigns Ba2 rating to Premier Foods
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