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Rating Action:

Moody's downgrades Shearer's first lien term loan to B2 on upsizing; outlook stable

15 Sep 2020

New York, September 15, 2020 -- Moody's Investors Service, ("Moody's") today downgraded Shearer's Foods, LLC's (Shearer's) proposed new first lien term loan to B2 from B1 on the upsizing of the first lien facility and equal downsizing of the proposed second lien term loan. All other ratings including the company's B2 CFR are unchanged. The rating outlook is stable.

The downgrade is the result of the lower amount of junior debt that will be in the capital structure after the second lien term loan was downsized by $90 million to $250 million and the first lien was increased by $90 million to $1,075 million, providing less loss absorption to the first lien debt. Moody's notes that the overall amount of debt and thus leverage will remain the same. The larger proportion of debt at the lower first lien interest rate will save interest costs going forward which is a long term positive.

The company is in the process of refinancing and increasing its first and second lien term loans and extending the maturities to 2027 and 2028 respectively. In addition to refinancing the existing first and second lien debt, the company will use proceeds to repay a subordinated seller note, repay revolver outstandings and fund a one-time $388 million special dividend to equity sponsors including Ontario Teachers' Pension Plan. The increased borrowings will lift debt to EBITDA leverage by a turn and a half, from 5.1x as of the LTM ended June, 2020 to approximately 6.6x at the close of the transaction, including Moody's adjustments. Moody's views the dividend payout and resulting increase in leverage to be financially aggressive but closing debt-to-EBITDA leverage of 6.6x will remain below 2017-2018 levels of over 7x when the company was faced with integration challenges following acquisitions and a poor potato crop.

The rating agency expects that operational improvements that have generated efficiencies and good business momentum as a result of pricing increases, mix shifts through eliminating less profitable SKUs and innovation will sustain the improvement in margins achieved over the last 18 months. Improved earnings will provide sufficient free cash flow to reduce debt-to-EBITDA leverage to closer to 6x over the next year. Free cash has improved meaningfully over the last two years and Moody's projects that it will exceed $55 million over the next 12 months.

The following ratings/ assessments are affected in today's action:

..Issuer: Shearer's Foods, LLC.

$1,075M Senior Secured 1st Lien Term Loan; to B2 (LGD3) from B1 (LGD3)

The Caa1 rating on the proposed second lien term loan is not affected. Ratings on the existing first and second lien term loans of B3 and Caa2, respectively, will be withdrawn upon closing of the transaction and repayment of those facilities.

RATING RATIONALE

Shearer's B2 Corporate Family Rating reflects the company's high financial leverage following the planned dividend recapitalization, aggressive financial policies under private equity ownership and significant customer concentration. Profitability and free cash flow have been improving after the company addressed challenges that followed a period of rapid growth through acquisition, with free cash flow of approximately $56 million expected in 2020 (before the special dividend payout). The company has performed well amid the disruptions brought on by the coronavirus, with high demand for snacking items at retail offset by disruption in its smaller food service channels and higher coronavirus-related costs which the company believes largely offset the benefit of higher volumes. The rating reflects the company's leading position as a producer of private label snacks, its scale as a contract manufacturer with nationwide reach and its very good liquidity supported by improving projected free cash flow, growing cash balances, its expectation that after the refinancing it will maintain an unutilized $125 million revolver and a covenant lite structure.

Environmental, Social and Governance considerations:

The rapid spread of the coronavirus outbreak, deteriorating global economic outlook, low oil prices, and high asset price volatility have created an unprecedented credit shock across a range of sectors and regions. Moody's regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. For more information on research on and ratings affected by the coronavirus outbreak, please see moodys.com/coronavirus.

Shearer's environmental impact remains low and the associated risks are limited. Environmental considerations are not a material factor in the rating.

Shearer's governance is influenced by its private ownership. Like other private equity sponsored firms, Shearer's has been comfortable operating with high financial leverage. Moody's views Shearer's private equity ownership, including the willingness to lever up to pay a large dividend and its historically aggressive acquisition strategy, as governance risks that create risk that debt and leverage will increase. However, the company's intention to rapidly pay down debt following the dividend recap is a partial mitigant.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING

The stable rating outlook reflects Moody's view that continued revenue growth and realization of cost efficiencies will sustain earnings growth and comfortably positive free cash flow. The outlook also reflects Moody's view that debt-to-EBITDA leverage will decline to a 6.0x range over the next year and that Shearer's will maintain very good liquidity.

Ratings could be upgraded if the company sustains debt to EBITDA below 5x, maintains good operating performance, generates consistently strong free cash flow, and adopts a more conservative financial policy.

Ratings could be downgraded if the company's liquidity deteriorates, operating performance weakens, if it engages in large debt financed acquisitions or shareholder returns, or if debt to EBITDA leverage is sustained above 6.5x.

Shearer's Foods, LLC, headquartered in Massillon, Ohio, manufactures snack food products such as kettle chips, tortilla chips, potato chips, extruded cheese snacks, cookies, and crackers for other companies. Revenue was approaching $1.3 billion for the 12 months ending June, 2020. Shearer's is majority owned by Ontario Teachers' Pension Plan and does not publicly disclose financial information.

The principal methodology used in these ratings was Consumer Packaged Goods Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1202237. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Linda Montag
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

John E. Puchalla, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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