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Rating Action:

Moody's rates Cooke Omega's new term loan Ba3, unsecured notes Caa1; assigns a B2 CFR to Cooke Aquaculture

02 Aug 2021

Approximately $1.06 billion of newly rated debt

Toronto, August 02, 2021 -- Moody's Investors Service ("Moody's") assigned a Ba3 senior secured ratings to Cooke Omega Investments Inc.'s ("Cooke Omega") proposed $480 million term loan B due 2028 and Caa1 senior unsecured ratings to the company's proposed $580 million notes due 2029. These instruments are issued by Cooke Omega, a wholly owned subsidiary of Cooke Aquaculture Inc. ("CAI") and guaranteed by CAI. Moody's also assigned a B2 corporate family rating (CFR) and B2-PD probability of default rating (PDR) to CAI. The ratings outlook is stable. Concurrently, Moody's has withdrawn Cooke Omega's B2 CFR and B2-PD PDR.

The proceeds of the proposed $1.38 billion debt offering will be used to refinance Cooke Omega and CAI's existing debt (up to CAD1.6 billion), pay a dividend to holding company Cooke Inc., fund cash to the balance sheet and pay related transaction costs. Cooke Omega's existing senior secured ratings remain unchanged at B3 and will be withdrawn when the existing debt is repaid with the proceeds from this offering.

Assignments:

..Issuer: Cooke Omega Investments Inc.

....Gtd. Senior Secured Term Loan B, Assigned Ba3 (LGD2)

....Gtd. Senior Unsecured Regular Bond/Debenture, Assigned Caa1 (LGD5)

..Issuer: Cooke Aquaculture Inc.

.... Corporate Family Rating, Assigned B2

.... Probability of Default Rating, Assigned B2-PD

Outlook Actions:

..Issuer: Cooke Aquaculture Inc.

....Outlook, Stable

..Issuer: Cooke Omega Investments Inc.

....Outlook, Remains Stable

Withdrawals:

..Issuer: Cooke Omega Investments Inc.

.... Corporate Family Rating, Withdrawn , previously rated B2

.... Probability of Default Rating, Withdrawn , previously rated B2-PD

RATINGS RATIONALE

CAI's B2 CFR benefits from 1) its strong market position as the leading North American producer of farmed Atlantic Salmon, a market with attractive long-term growth prospects; 2) geographically diversified operations; 3) vertically integrated operations, which provides operating flexibility and efficiency; and 4) a large portfolio of aquaculture licenses, which creates a significant barriers to entry. The company is constrained by 1) elevated leverage, expected to be around 6.4x (pro forma for the announced refinancing) LTM Q2 2021; 2) the sensitivity of operating and financial results to the volatility in market prices; 3) exposure to disease outbreaks and weather that could impact both the quality and volumes of fish harvested; and 4) private ownership that could potentially lead to shareholder friendly transactions.

The proposed Ba3 term loan B rating is two notches above CAI's B2 CFR, based on the application of Moody's Loss Given Default for Speculative-Grade Companies methodology, and reflects its seniority over the unsecured obligations which provide loss absorption. The term loan B will be secured by a first lien priority on substantially all assets of Cooke Omega, guaranteed by CAI and pari passu with CAI's CAD500 million revolving credit facility (unrated) and CAD400 million term loan A (unrated). Cooke Omega's proposed senior unsecured notes are rated Caa1, two notches below the CFR, to reflect its junior ranking behind the secured obligations.

CAI has good liquidity, with sources of around CAD600 million compared to about CAD10 million of uses. Sources consist of CAD64 million of cash on the balance at close, a fully available CAD500 million of revolving credit facility due in 2026, and Moody's expectation of positive free cash flow of about CAD40 million (excluding the debt funded dividend) over the next 4 quarters. Uses of liquidity consist of CAD10 million of mandatory debt repayment in the form of term loan amortization. The revolver is subject to financial covenants such as a net leverage ratio and interest coverage, which Moody's expect the company to be compliant with over the next 12 months. CAI will have limited flexibility to generate liquidity from assets sales, as most of its assets are encumbered.

As proposed, the new credit facilities are expected to provide covenant flexibility that, if utilized, could negatively impact creditors. Notable terms include the following: Incremental debt capacity up to the greater of CAD350 million and 100% of Adjusted Consolidated EBITDA, plus unlimited amounts subject to a first lien net leverage ratio test equal to threshold at closing (3x) (if pari passu secured). No portion of secured incremental debt may be incurred with an earlier maturity than the initial term loans. The credit agreement does not permit transfers of any material asset from any Loan Party to a non-guarantor member of the Restricted Group or from any Loan Party or other member of the Restricted Group to any unrestricted subsidiary. Non-wholly-owned subsidiaries are not required to provide guarantees; dividends or transfers resulting in partial ownership of subsidiary guarantors could jeopardize guarantees, subject to protective provisions which only permit guarantee releases if such transfer is for a bona fide business purpose with a non-affiliate, subject to available investment capacity. The credit agreement provides some limitations on up-tiering transactions, including consent of all affected lenders for modifications to subordinate the obligations or the liens to any other indebtedness or liens, or to the waterfall provisions. The above are proposed terms and the final terms of the credit agreement may be materially different.

The stable outlook reflects Moody's expectation that the company's leverage will improve below 5x in the next 12-18 months driven by EBITDA expansion mainly from the recovery in foodservice demand and better efficiencies due to improving farmgate costs (costs incurred to grow and harvest the fish). The outlook also reflects Moody's expectation that the company will remain positive free cash flow generative and maintain good liquidity.

As a private company, CAI has less market transparency than publicly traded peers. The company is also more likely to engage in shareholder friendly activities, although Moody's note the company's solid track record of conservative financial policies. In addition, the company has pursued debt funded acquisitions in the past as part of its growth strategy, such as the acquisition of Omega Protein that was completed in 2017. Nonetheless, management has demonstrated a good track record of deleveraging following these acquisitions.

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

A rating upgrade could be considered if the company is able to generate consistent positive free cash flow, sustain leverage (adjusted debt/EBITDA) below 4.5x (expected to be around 6.4x LTM Q2 2021 pro forma) and EBITA/Interest above 2x (expected to be around 1.2x LTM Q2 2021 pro forma). A rating downgrade could be considered if the company's liquidity deteriorates, possibly from sustained negative free cash flow, or if leverage (adjusted debt/EBITDA) is sustained above 6.5x (expected to be around 6.4x LTM Q2 2021 pro forma) or EBITA/Interest is sustained below 1x (expected to be around 1.2x LTM Q2 2021 pro forma).

The principal methodology used in these ratings was Protein and Agriculture published in May 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1113389. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Based in Blacks Harbor, New Brunswick, Canada Cooke Aquaculture Inc. is a vertically integrated aquaculture company. CAI raises, harvests, process and distributes Atlantic and Coho Salmon, Sea Bass, Sea Bream and other specialty products. Through its wholly owned subsidiary, Cooke Omega Investments Inc. the company harvests, processes and distributes fish based animal and human nutrition products. CAI reported revenues between CAD1 billion and CAD2 billion for the financial year 2020.

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

These ratings are 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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

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.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK 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.

Aziz Al Sammarai
Analyst
Corporate Finance Group
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Donald S. Carter, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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