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Rating Action:

Moody's downgrades Deoleo to Ca from Caa1; negative outlook

13 May 2019

Milan, May 13, 2019 -- Moody's Investors Service ("Moody's") has today downgraded the corporate family rating (CFR) of Deoleo S.A. ("Deoleo", or "the company") to Ca from Caa1 and its probability of default rating (PDR) to Ca-PD from Caa1-PD. Concurrently, Moody's has also downgraded to Ca from Caa1 the ratings on the senior secured EUR460 million first lien term loan due June 2021 and the EUR85 million first lien revolving credit facility (RCF) due June 2020, and to C from Caa3 the rating on the senior secured EUR55 million second lien term loan due June 2022. The outlook remains negative.

"Today's rating action reflects the increased likelihood that Deoleo will need to restructure its debt or to request an extension of its debt maturities which will result in losses for its financial creditors. Such losses would qualify for a distressed debt exchange (DE) which Moody's consider as a default", says Giuliana Cirrincione, Moody's lead analyst for Deoleo.

RATINGS RATIONALE

Deoleo's operating performance during 2018 continued the downward trend started in 2014, with the company-reported EBITDA dropping to EUR15.4 million from EUR31.3 million in the prior year. As a result of the low EBITDA, Moody's-adjusted (gross) debt to EBITDA ratio was in excess of 30x as of December 2018, which Moody's view as unsustainable.

Moody's believes that Deoleo's capital structure is unsustainable and the slow and uncertain EBITDA recovery prospects suggest a very high likelihood of a balance sheet restructuring over the next 12-18 months that could be detrimental to some of the company's financial creditors. The Ca CFR assumes a family recovery rate between 35% and 65%. The closest debt maturity date for Deoleo is in June 2020, i.e. when the EUR60 million drawings (as of 31st March 2019) under its RCF become due. Moody's considers that a temporary extension of upcoming maturities might be also viewed as a distressed debt exchange, under Moody's criteria, depending on the agreed terms of the extension.

The company has engaged in an extensive overhaul of its business operations over the past three years and is currently intensifying investments into its premium brands to support recovery in profitability. However, Deoleo is still facing tough trading conditions in the core Italian and US markets as a result of lower volumes and strong price competition. In Moody's view, the company's strategy to focus on advertising, marketing and R&D to favour a shift in competition from price to quality will require time to bear fruits. This underpins the rating agency's expectation that Deoleo's credit metrics will remain very weak over the next 12-18 months and this leaves high uncertainty around the company's financial strategy and future capital structure. As a result the likelihood of a debt restructuring has increased as the debt maturities approach.

Despite a cash balance of EUR79 million as of 31 March 2019 (which includes the additional EUR26 million draw down under the RCF during the first quarter of 2019, leading to a total outstanding amount of EUR60 million under this facility), Deoleo's liquidity has weakened further due to refinancing risk. This reflects a persistently negative free cash flow generation (i.e. after interest payments, as per Moody's definition) which has been eroded over the past five years by restructuring costs and unfavorable olive oil prices and foreign exchange movements.

According to Moody's estimates, the company's internally generated cash flow over the next 12-18 months will not be enough to cover for interest expenses, the planned advertising investments, seasonal working capital requirements and maintenance capital spending. However, Deoleo's ability to fully draw down the RCF, whose total size is EUR85 million and will expire in June 2020, is constrained by the facility's first lien net leverage covenant of 7.75x, tested if the RCF is more than 70% (or EUR60 million) drawn.

STRUCTURAL CONSIDERATIONS

The Ca ratings of the EUR85 million first lien RCF and EUR460 million first lien term loan are in line with the CFR, while the rating of the EUR55 million second lien term loan is C because of the subordination of claims in an enforcement scenario in accordance with the terms of the intercreditor agreement. Neither the first and second lien facilities have financial covenants, with the exception of a 7.75x total net leverage ratio covenant, tested when drawings under the RCF exceed 70% of the committed amount. The second lien can be paid ahead of the first lien, provided the total net leverage ratio is below 4.25x or if it is equity financed.

RATIONALE FOR THE NEGATIVE OUTLOOK

The negative outlook reflects Moody's view that the risk of a default remains high, with potential losses for financial creditors, either in the form of a distressed debt exchange or debt maturity extensions.

WHAT COULD CHANGE THE RATING UP/DOWN

Upward pressure on the ratings is unlikely in the short term but could arise if a sustainable financial structure is put in place and the company is able to restore positive free cash flow generation capacity.

Downward pressure on the ratings could materialise if Deoleo is unable to refinance its upcoming maturities or if Moody's believes that recovery prospects for creditors will further deteriorate.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Global Packaged Goods published in January 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

Headquartered in Madrid, Deoleo is the largest branded olive oil bottler globally, with proprietary brands including Carapelli, Bertolli, Carbonell and Hojiblanca. The company engages in the refining, blending, distribution and sale of olive oil (over 80% of revenue), but also of seed oil, vinegars and sauces, mostly through the retail channel. In 2018 the company reported EUR606 million sales (2017: EUR692 million) and EUR15 million EBITDA (2017: EUR31 million). Since 2014, CVC Capital Partners (CVC) is the reference shareholder of Deoleo, with an ownership stake which has increased over time to 56.4% following subsequent capital increases, the last of which was completed in October 2018.

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 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.

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.

Giuliana Cirrincione
Analyst
Corporate Finance Group
Moody's Italia S.r.l
Corso di Porta Romana 68
Milan 20122
Italy
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Ivan Palacios
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Italia S.r.l
Corso di Porta Romana 68
Milan 20122
Italy
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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