Proposed $1.35 billion of secured bank facilities rated (P)Ba3
New York, October 20, 2010 -- Moody's Investors Service ("Moody's") assigned first-time ratings
for Green Mountain Coffee Roasters, Inc. ("GMCR") including
a provisional (P)Ba3 Corporate Family Rating, (P)B1 Probability
of Default Rating and SGL-3 Speculative Grade Liquidity Rating.
Moody's also assigned a (P)Ba3 to $1.35 billion of proposed
senior secured bank facilities. Moody's will assign definitive
ratings after the company completes the proposed bank debt offering.
The rating outlook is stable.
The (P)Ba3 Corporate Family Rating reflects the expanding base and growing
retail acceptance of GMCR's category-leading Keurig single-serve
coffee brewers that in turn drive sales of its high-margin "K-Cup"
coffee cartridges. The rating also reflects the company's
aggressive growth strategy that has involved the rapid consolidation of
K-Cup licensees over the past 18 months in four separate transactions
valued at $1.4 billion, including the $890
million pending acquisition of Canada-based Van Houtte, Inc.
("Van Houtte"). The resulting leverage from these acquisitions
is moderated by the high operating profit margins generated by these businesses
and by the $637 million of equity raised to partially fund them.
We do not anticipate any major integration problems with any of the recent
acquisitions based on their modest business complexity and similarity
to GMCR's core K-Cup business. After GMCR has consolidated
the last major K-Cup licensee that is Van Houtte, we expect
that GMCR will curtail its acquisition activity in the near-term.
Of greater concern is the company's ability to manage its over 50%
organic sales growth rate, which has intensified demands on its
highly concentrated supply chain and distribution network. The
company currently contracts with a single manufacturer in Hong Kong to
make its brewers, and in turn distributes them through a single
distributor in the United States—a material weakness in its operations
and risk management policy, in our view. In addition,
although gross cash flows have grown rapidly, the incremental working
capital and plant expansion required to keep up with rapid brewer and
K-Cup demand has consumed substantially all of GMCR's operating
cash flow generation. As a result, we expect that negative
free cash flow is likely to persist for the foreseeable future,
and that GMCR could exhaust availability under its bank facilities within
the next 18 to 24 months unless it raises additional financing.
GMCR should be able to sustain reasonable access to the capital markets
in the intermediate term based on its modestly leveraged credit profile,
its recent successful raise of $250 million of equity from Italian
coffee roaster Lavazza, and its current public equity capitalization
of over $4 billion.
"GMCR's heavy reliance on external financing raises liquidity
concerns, but overall financial leverage should remain in an acceptable
range for the Ba3 rating, based on our expectation that wider adoption
of the Keurig machines will drive operating profits from K-Cup
sales at a rate faster than the company's debt incurrence,"
said Brian Weddington, Moody's senior credit officer.
At closing of the Van Houtte acquisition, expected in late 2010,
Moody's estimates proforma debt to EBITDA at 4.1 times,
declining to below 3.25 times by the end of fiscal 2011.
GMCR competes against the major coffee producers like Kraft and Sara Lee,
many of which market their own brewing platforms in the single-serve
coffee format. Moody's anticipates that eventually GMCR will
also face direct competition in the manufacturing and marketing of Keurig-compatible
coffee cartridges (i.e. K-Cups) from these companies
as well as from smaller coffee roasters looking to develop new sales channels.
"Competitive pressures are likely to intensify after 2012 when two
of GMCR's key patents expire, which will likely lead to a
gradual decline in the company's K-Cup market share and profit
margins, " added Weddington. "For this reason,
we expect GMCR to strengthen its debt protection measures over the next
18 months and sustain them at levels that are stronger than typical for
a Ba3 rated company."
Finally, Moody's cautions that an ongoing SEC investigation
into the company's revenue recognition practices could have consequences
to GMCR's credit ratings if the outcome is significantly more negative
The proceeds from the new bank facilities will be used to refinance approximately
$275 million in existing debt and to fund the $890 million
acquisition of Van Houtte, a transaction that was announced on September
14, 2010. At closing, we expect approximately $575
to be drawn under the proposed $750 million revolving credit facility.
Green Mountain Coffee Roasters, Inc.
Corporate Family Rating at (P)Ba3;
Probability of Default Rating at (P)B1;
Speculative Grade Liquidity Rating at SGL-3;
$750 million senior secured bank revolving credit facility due
2015 at (P)Ba3 (LGD-3, 30%);
$250 million senior secured bank Term Loan A due 2015 at (P)Ba3
$350 million senior secured bank Term Loan B due 2016 at (P)Ba3
The proposed senior credit facilities will be secured by a first priority
lien on substantially all the assets of GMCR and domestic subsidiaries
and by 65% of the capital stock of GMCR's non-U.S.
subsidiaries (principally, the Canadian operations). The
domestic subsidiaries, which will be guarantors under the proposed
agreement, on a proforma basis generate approximately 75%
of total revenues and EBITDA.
Material terms of the bank agreement have not been finalized, including
financial covenants and pricing, thus, definitive ratings
on the bank facilities are subject to Moody's review of final documentation.
The SGL-3 rating is based on our expectation that GMCR will have
adequate liquidity over the next twelve months, but will be reliant
on revolver borrowings to fund operations. Following the funding
of the Van Houtte acquisition, we expect the company to have $175
million of availability under its proposed 5-year $750 million
revolving credit facility. The company will use this availability
to fund working capital needs that typically peak in the fourth quarter
as the company builds brewer inventory for the holiday season.
Given the company's high demands for growth capital, Moody's
does not anticipate positive free cash flow generation in the near-term.
The bank debt instrument ratings reflect both the overall probability
of default (as reflected in the (P)B1 PDR) and a below-average
mean family loss given default assessment of 30% (or an above-average
mean family recovery estimate of 65%), in line with Moody's
LGD Methodology and typical treatment for an all-first-lien
bank senior secured debt capital structure.
The principal methodologies used in rating Green Mountain Coffee Roasters,
Inc. 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. Other methodologies and factors that may have been considered
in the process of rating this issuer can also be found on Moody's website.
Green Mountain Coffee Roasters, Inc. based in Waterbury,
Vermont, is a manufacturer of specialty coffee and other hot beverages,
and single serve coffee brewing systems. The company's operations
are managed through two business units. The Specialty Coffee business
unit produces coffee, tea and hot cocoa from its family of brands,
including Tully's Coffee®, Green Mountain Coffee®,
Newman's Own® Organics coffee, Timothy's World Coffee®
and Diedrich®, Coffee People® and Gloria Jeans®,
a licensed trademark. The Keurig business unit manufactures gourmet
single-cup brewing systems. GMCR produces the K-Cup®
portion packs for Keurig® Single-Cup Brewers. Moody's
estimates that fiscal 2010 sales totaled $1.3 billion.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of assigning
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.
Brian Weddington, CFA
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's assigns (P)Ba3 first-time rating to Green Mountain Coffee Roasters
250 Greenwich Street
New York, NY 10007